On the distribution of government bond returns: evidence from the EMU |
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Authors: | Christian Gabriel Christian Lau |
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Affiliation: | 1. School of Economics and Business, Martin-Luther-University Halle-Wittenberg, Gro?e Steinstr. 73, 06108?, Halle, Germany
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Abstract: | This paper assesses the statistical distribution of daily EMU bond returns for the period 1999–2012. The normality assumption is tested and clearly rejected for all European countries and maturities. Although skewness plays a minor role in this departure from normality, it is mainly due to the excess kurtosis of bond returns. Therefore, we test the Student’s t, skewed Student’s t, and stable distribution that exhibit this feature. The financial crisis leads to a structural break in the time series. We account for this and retest the alternative distributions. A value-at-risk application underlines the importance of our findings for investors. In sum, excess kurtosis in bond returns is essential for risk management, and the stable distribution captures this feature best. |
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