Broken Symmetry, Conservation Law, and Scaling in Accumulated Stock Returns -- a Modified Jones-Faddy Skew t-Distribution Perspective

TL;DR

This paper examines multi-day S&P 500 returns, revealing linear relationships in variance and mean despite asymmetries, using a modified skew t-distribution for analysis.

Contribution

It introduces a modified Jones-Faddy skew t-distribution model to explain the linear scaling of variance and mean in accumulated stock returns.

Findings

Realized variance scales linearly with days of accumulation.

Mean of returns also shows near perfect linear dependence.

Distribution exhibits positive mean and negative skew despite symmetry breaking.

Abstract

We analyze historic S&P500 multi-day returns: from daily returns to those accumulated over up to ten days. Despite symmetry breaking between gains and losses in the distribution of returns, resulting in its positive mean and negative skew, realized variance (volatility squared) exhibits remarkably good linear dependence on the number of days of accumulation. Mean of the distribution also shows near perfect linear dependence as well. We analyze this phenomenon both analytically and numerically using a modified Jones-Faddy skew t-distribution.