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Simple Goodness-of-Fit Tests for Symmetric Stable Distributions

Published online by Cambridge University Press:  19 October 2009

Erwin M. Saniga  and
Jack C. Hayya
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Extract

Stable distributions are becoming increasingly popular as appropriate models for stock price changes and other economic phenomena. As a result, there is an expanding body of literature on inferential procedures for this family of distributions. Computationally simple estimators for the parameters of symmetric stable distributions have been provided by Fama and Roll. Little attention, though, has been given to goodness-of-fit tests for members of this family other than the normal.

It is the purpose of this paper to discuss simple goodness-of-fit hypothesis tests using kurtosis, b2, to distinguish among members of the stable family. The b2 tests of hypothesis comprise: 1) a null normal versus a nonnormal symmetric stable alternative; 2) a null nonnormal symmetric stable versus a normal alternative; and 3) a null nonnormal stable versus another nonnormal stable alternative. Tables that give the percentage points of b2 and that are necessary for these tests of hypothesis are given. Apart from providing critical values for the tests, the tables allow the researcher to calculate the power. It will be seen that the b2 test exhibits excellent power.

It is then hoped that computational convenience will make b2 an important tool for researchers and practitioners in finance. It is also hoped that the procedures we provide will aid these researchers and practitioners in the construction of appropriate financial models.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 12 , Issue 2 , June 1977 , pp. 276 - 289
Copyright
Copyright © School of Business Administration, University of Washington 1977

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