Long-term annual stock market returns are almost lognormally distributed but have slightly fatter tails (are riskier) than the lognormal distribution. Most of this extra risk as evidenced by the fatter tails is caused by volatility clustering, i.e., particularly large and particularly small price movements in both directions come in clusters. Thus Monte Carlo simulations using the lognormal distribution understate both the short-term and long-term risk of the stock market.
BobK
BobK
Statistics: Posted by bobcat2 — Wed Aug 27, 2025 9:25 am — Replies 23 — Views 3793