Modeling maximum entropy distributions for financial returns by moment combination and selection
Journal
Journal of Financial Econometrics
Journal Volume
13
Journal Issue
2
Pages
414-455
Date Issued
2015
Author(s)
Abstract
In empirical finance, conditional distributions of financial returns are often established by specifying the standardized error distributions of GARCH-type models. In this article, we apply the maximum entropy (MaxEnt) approach and propose a moment combination and selection method to explore this distribution-building problem. We demonstrate that this framework is useful for unifying and comparing existing distribution specifications, generating more suitable distribution spec-ifications, and shedding light on the roles of different moments in the distribution-building process. We also show the applicability of our method to real data by means of an empirical study on stock index returns.
Type
journal article