Fat tails - Identification of fat tails - Analyzing fat tails

4 important questions on Fat tails - Identification of fat tails - Analyzing fat tails

Provide a simple interpretation of QQ plots

The higher the quantiles go, the more frequent high data points go.

Whats the relevance of the student-t distribution in analyzing fat tails?

Comparing the data with a fat tailed distribution can help us figuring out how fat the tails are.
The student-t distribution has fat tails and its degrees of freedom indicate how fat the tails are.

How would we use the Student's t-distribution to determine the degree of fat in the tails?

We'd look at the distribution's Degree of Freedom denoted with v.

v = ∞, implies the normal
v = < 2 implies fat tails
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Whats the degrees of freedom (the fatness of the tails) for a typical stock?

v = DOF
3<v<5

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