Weekend Trader Alternative Distributions
As we saw last week, the normal (Gausssian) distribution doesn't fit the returns per trade of Weekend Trader really well. Therefore I fitted 3 alternative distributions that have been suggested for modeling of financial data:
- Cauchy
- Stable
- Generalized Hyperbolic
I will discuss some of their properties in subsequent posts. Let's first see what they look like:
The y-axis now shows the density (rather than the frequency, shown in the previous post). Not surprisingly, the 3 alternative distributions seem to follow the histogram much closer than the normal (red line) distribution. I obtained the parameters of all distributions through maximum-likelihood estimation (mle), an often used optimization method in statistics.
Why is all this useful, you might ask? Hang on, we'll discuss soon...
3 comments:
During my last holiday I read an entertaining book which deals (in a way) with these distributions and especially the "fat tail" phenomenons:
"Black Swan" by N.N. Taleb
enlightening!
It's an interesting read! Did you read "The (Mis)Behavior of Markets" by Mandelbrot as well?
Yes, but it is too descriptive, geometric for me. I miss "the meat".
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