Fat Tails in Financial Return Distributions Revisited: Evidence from the Korean Stock Market

TL;DR

This paper empirically investigates fat tails in Korean stock market returns, revealing they are more pronounced in recent times and for small-cap stocks, persisting even after accounting for volatility and crises.

Contribution

It provides new evidence that fat tails are persistent and not solely due to volatility clustering or crises, using extensive Korean stock data and advanced statistical controls.

Findings

Fat tails are more prominent in recent periods.

Small-cap stocks exhibit fatter tails than large-cap stocks.

Fat tails persist after controlling for volatility and crises.

Abstract

This study empirically re-examines fat tails in stock return distributions by applying statistical methods to an extensive dataset taken from the Korean stock market. The tails of the return distributions are shown to be much fatter in recent periods than in past periods and much fatter for small-capitalization stocks than for large-capitalization stocks. After controlling for the 1997 Korean foreign currency crisis and using the GARCH filter models to control for volatility clustering in the returns, the fat tails in the distribution of residuals are found to persist. We show that market crashes and volatility clustering may not sufficiently account for the existence of fat tails in return distributions. These findings are robust regardless of period or type of stock group.