Actually, I recently read something by Scholes where
he admitted the importance of the normal distribution
assumption and admitted that it does not hold.
After initially following Mandelbrot to advocate the
asymptotically infinite variance Pareto-Levy distribution,
Fama later did some empirical studies that claimed to
show that it was not so. This was a major influence on
Black-Scholes and all those guys. However, more recent
studies have brought it back, especially in the form of the
fourth moment, rather than the second. On this, see
Mico Loretan and Peter C.B. Phillips, "Testing the covariance
stationarity of heavy-tailed time series: An overview of the
theory with applications to several financial datasets." Journal
of Empirical Finance, January 1994, vol. 1, no. 2, pp. 211-248.
BTW, of course it is indeed a stylized fact that most
financial markets exhibit "fat tails" (leptokurtosis), whatever one
attributes them to.
Barkley Rosser
-----Original Message-----
From: Michael Perelman <[EMAIL PROTECTED]>
To: [EMAIL PROTECTED] <[EMAIL PROTECTED]>
Date: Wednesday, August 23, 2000 10:56 AM
Subject: [PEN-L:741] Jamie Galbraith on Long Term Capital Management
>This short book review also touches on our discussion of the Pareto
>distribution. It is readable, nontheless, for non-economists.
>
>http://www.washingtonmonthly.com/books/2000/0009.galbraith.html
>
>--
>Michael Perelman
>Economics Department
>California State University
>Chico, CA 95929
>
>Tel. 530-898-5321
>E-Mail [EMAIL PROTECTED]
>
>
