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The Process of price formation and the skewness of asset returns
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The Process of price formation and the skewness of asset returns

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  • Stefan Reimann

Abstract

Distributions of assets returns exhibit a slight skewness. In this note we show that our model of endogenous price formation [Reimann 2006] creates an asymmetric return distribution if the price dynamics are a process in which consecutive trading periods are dependent from each other in the sense that opening prices equal closing prices of the former trading period. The corresponding parameter skewness (preference) parameter is estimated from daily prices from 01/01/1999 - 12/31/2004 for 9 large indices. For the S&P 500, the skewness distribution of all its constituting assets is also calculated. The skewness distribution due to our model is compared with the distribution of the empirical skewness values of the single assets.

Suggested Citation

  • Stefan Reimann, 2006. "The Process of price formation and the skewness of asset returns," IEW - Working Papers 276, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:276
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    References listed on IDEAS

    as
    1. Stefan Reimann, 2006. "An Elementary Model of Price Dynamics in a Financial Market Distribution, Multiscaling & Entropy," IEW - Working Papers 271, Institute for Empirical Research in Economics - University of Zurich.
    2. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
    3. Stefan Reimann, 2006. "An elementary model of price dynamics in a financial market: Distribution, Multiscaling & Entropy," Papers physics/0602097, arXiv.org.
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    More about this item

    Keywords

    skewness asset returns; price process;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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