THE RELIABILITY OF THE STABILITY-UNDER-ADDITION TEST FOR THE STABLE-PARETIAN HYPOTHESIS
Many financial/statistics studies have considered the validity of the stable-Paretian hypothesis for various financial variables such as stock returns and exchange rates. By using the ''stability-under-addition'' test, the combined conclusions of a good number of recent studies create the impression that the stable-Paretian model has been conclusively rejected for these variables. This study systematically calibrates the performance of the stability-under-addition test, our results clearly demonstrate that the test is very unreliable for testing the stable-Paretian hypothesis. Our results imply that: (i) earlier studies refuting the stable-Paretian hypothesis need to be reexamined; (ii) the stable-Paretian hypothesis is still plausible for many financial variables; (iii) more reliable stable-Paretian-hypothesis tests need to be developed.
stable-paretian distribution hypothesis testing modeling of financial variables