https://doi.org/10.52903/wp2022318
SUPERKURTOSIS
Stavros Degiannakis
Bank of Greece
George Filis
University of Patras
Grigorios Siourounis
Panteion University of Social and Political Science, and Brown University
Lorenzo Trapani
University of Nottingham
Abstract
Very little is known on how traditional risk metrics behave under intraday trading. We fill this void by examining the finiteness of the returns’ moments and assessing the impact of their infinity in a risk management framework. We show that when intraday trading is considered, assuming finite higher order moments, potential losses are materially larger than what the theory predicts, and they increase exponentially as the trading frequency increases - a phenomenon we call superkurtosis. Hence, the use of the current risk management techniques under intraday trading impose threats to the stability of financial markets, given that capital ratios may be severely underestimated.
Keywords: ultra-high frequency trading, risk management, finite moments, superkurtosis
JEL-Classification: C12, C54, F30, G10, G15, G17.
Acknowledgements: We would like to thank Rafael La Porta, Adam McCloskey, Lucio Sarno and Ron Smith for their valuable comments. The views expressed in this paper are those of the author and not necessarily those of either the Bank of Greece or the Eurosystem.
Correspondence:
Stavros Degiannakis
Bank of Greece,
21 E. Venizelos Avenue, 10250,
Athens, Greece
e-mail: sdegiannakis@bankofgreece.gr