The Chinese Carnage Revisited, from Bernd Dittmann
Having continued with Jay Pasch's counting of the Chinese carnage of Tuesday (as published here on Feb 28th), and instead of using confidence intervals, I looked at extreme values. Based on daily returns from the 2nd of January 1987 utill today (4992 obs.), here are the left and right tails of the return distribution:
%return <-% obs normal dist >+% obs
0.1 2184 2321 2418
0.5 1466 1865 1663
1 876 1337 1041
2 334 596 371
3 140 182 136
4 69 50 61
5 36 9 27
6 23 1 15
7 18 0 9
8 12 0 5
9 8 0 2
10 6 0 2
What is clearly striking is that declines of three percent or more have been observed more frequently than 3+ percent increases. If one were to use a normal distribution to describe Hang Seng daily returns (which is rejected at any level of significance), one would clearly underestimate the frequency of extreme returns of ± 4 and surely of ± 7 percent. Which distribution would thus fit Hang Seng returns, and also its asymmetry in extreme values?