Use of the Pearson System of Frequency Curves for the Analysis of Stock Return Distributions: Evidence and Implications for the Italian Market

Abstract

Pearson’s system of continuous probability distributions is used herein to analyze return distributions of the shares in all companies listed on the Italian stock exchange. Results show that when finite time periods are examined, the type IV distribution describes the behavior of almost all returns on stocks. The occasional exceptions to this rule appear to be linked only with the occurrence of extraordinary events in the life of a company. When an infinite time horizon is assumed, the results do not reject the hypothesis that the distributions are of type VII, which is a special, symmetrical and hyper-kurtotical case of type IV distribution that subsumes the Student's t and the Cauchy distributions, and is easier to deal with in practice.

Keywords: Pearson system, type IV, type VII, Italian equity market, stock return distributions

JEL Classification: G11