Analysing functional forms of stock returns

Abstract

An a priori test developed by Elderton (1938) is used to examine the distributions of stock returns. The test is known as the kappa criterion (Kcriterion). There have been many functional forms of statistical distributions used to approximate stock return graduations over the past few years. The most prevalent class of distributions analysed have been from the Pearsonian family. The methodology presented is pretest. The Kcriterion should be used as a way to initially limit the class of stock return distributions under consideration. The Kcriterion should not, and was not intended to be used as a definitive test of functional form choice. © 1992, Taylor & Francis Group, LLC. All rights reserv..