Insight Things

A scientific blog revealing the hidden links which shape our world

Tag: log-normal

On the distribution of stock return

Having a model to predict the performance of a share would be great, wouldn’t it? In this article I will show that such a model indeed exists. From a statistician’s point of view, the rate of stock return follows a particular probability distribution (which is also one of the preconditions of the Black-Scholes model). Assuming that parameters remain stable over a period of time, we can also give probabilities for some rates of stock return. Got curious? more →

Log-normal distribution mistaken for normal

Quick question: Is BASF’s day-to-day rate of stock returns (shown below) distributed normally?

Day-to-day rates of return of BASF stock

Yes? In theory it isn’t! In theory rates of stock returns follow a lognormal distribution as I have shown in “On the distribution of stock return”. Unfortunately, most people don’t take the lognormal distribution serious, although it is very often at work! This article shows how the lognormal distribution arises and why its shape sometimes mistaken for a normal distribution. more →

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