2.6 Summary

Financial data display unique characteristics known as stylized facts, with the most prominent ones including:

  • Lack of stationarity: The statistics of financial data change over time significantly and any attempt at modeling will have to continuously adapt.

  • Volatility clustering: This is perhaps the most visually apparent aspect of financial time series. There are a myriad models in the literature that can be utilized for forecasting (covered in Chapter 4).

  • Heavy tails: The distribution of financial data is definitely not Gaussian and this constitutes a significant departure from many traditional modeling approaches (covered in Chapter 3).

  • Strong asset correlation: The goal in investing is to discover assets that are not strongly correlated, which is a daunting task due to the naturally occurring strong asset correlation.