COMPOUND DISTRIBUTION MODELS OF STOCK RETURNS: AN EMPIRICAL COMPARISON

The study provides empirical tests and comparison of mixed diffusion-jump processes and finite mixtures of normal processes as models of stock price behavior. For weekly returns, both specifications have significantly higher descriptive validity than a stationary normal distribution, and, in most cases, mixed diffusion-jump processes are empirically superior to finite normal mixtures. The distribution of monthly returns, however, can be safely assumed to be approximately normal.