Mandelbrot’s book, “The Mis-Behavior of Markets” is all about this and is an excellent read."We" know that stock returns do NOT follow a normal distribution and that the tails are a lot fatter than for a normal distribution.https://www.youtube.com/watch?v=HBluLfX2F_k
It basically says that a lot of natural phenomenon follow power law distributions rather than gaussian. This means that extremely impactful events are much more common than what would be predicted by a gaussian or normal distribution. The one day drop in 1987 of over 20% in the stock market comes to mind.
Does anyone know how well do one day stock market returns follow power law vs normal distributions?
Benoit Mandelbrot has proposed that stock returns follow a Pareto-Levy distribution. If he was correct, then this means that stock returns do not have a standard deviation ...
Cheers
Statistics: Posted by Fat Tails — Mon Dec 01, 2025 12:17 am — Replies 9 — Views 959