A Test for Symmetry with Leptokurtic Financial Data

Posted: 29 Feb 2008

See all articles by Gamini Premaratne

Gamini Premaratne

University of Illinois at Urbana-Champaign - Department of Economics; University of Brunei Darussalam

Anil K. Bera

University of Illinois at Urbana-Champaign - Department of Economics

Date Written: 2005

Abstract

Most of the tests for symmetry are developed under the (implicit or explicit) null hypothesis of normal distribution. As is well known, many financial data exhibit fat tails, and therefore commonly used tests for symmetry (such as the standard b test based on sample skewness) are not valid for testing the symmetry of leptokurtic financial data. In particular, the b test uses third moment, which may not be robust in presence of gross outliers. In this article we propose a simple test for symmetry based on the Pearson type IV family of distributions, which take account of leptokurtosis explicitly. Our test is based on a function that is bounded over the real line, and we expect it to be more well behaved than the test based on sample skewness (third moment). Results from our Monte Carlo study reveal that the suggested test performs very well in finite samples both in terms of size and power. Simulation results also support our conjecture of the tests to be well behaved and robust to excess kurtosis. We apply the test to some selected individual stock return data to illustrate its usefulness. 1 1

Keywords: b test, kurtosis, Monte Carlo study, Pearson family of distributions, Rao`s score test, skewness, tan(·) function

Suggested Citation

Premaratne, Gamini and Premaratne, Gamini and Bera, Anil K., A Test for Symmetry with Leptokurtic Financial Data ( 2005). Journal of Financial Econometrics, Vol. 3, No. 2, pp. 169-187, Spring 2005, Available at SSRN: https://ssrn.com/abstract=821744

Gamini Premaratne

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

University of Brunei Darussalam ( email )

Jalan Tungku Link
Gadong, BE1410
Brunei

Anil K. Bera (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States
217-333-4596 (Phone)
217-244-6678 (Fax)

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