1. The stylized facts of return series
In this chapter and the previous chapter, you have been learning about the empirical properties of financial return series. While you have mainly looked at equity data, the properties observed are remarkably persistent across many different kinds of asset data.
2. The stylized facts
For that reason, they are often referred to as the "stylized facts" of financial return series.
Consider a short-interval log-return series (such as daily or weekly).
Here is a summary of the stylized facts:
1) Return series are heavier-tailed than normal (leptokurtic)
2) The volatility of return series appears to vary over time
3) Return series show relatively little serial correlation
4) Series of absolute returns show a profound serial correlation
5) Extreme returns appear in clusters
6) Returns aggregated over longer periods tend to become more normal and less serially dependent
3. Let's practice!
To finish off this chapter, you will look at some FX and some interest-rate return data and check whether the stylized facts concerning serial dependence hold for these data as well.