Stochastic Behaviour of European Stock Markets Indices

This paper is concerned with modelling return generating processes in several European stock markets. Distributional properties of daily stock returns play a crucial role in valuation of contingent claims and mean-variance asset pricing models, as well as in their empirical tests. A common assumption underlying a considerable body of finance literature is that the logarithm of stock price relatives are independent and identically distributed according to a normal distribution with constant variance, while little attention is paid to the empirical fit of the postulated process. For instance, the mean-variance asset pricing models of Sharpe (1964) and the option pricing model of Black and Scholes (1973) are based on the assumption of normally distributed returns. Moreover, the normality assumption and the parameter stability are necessary for most of statistical methods usually applied in empirical studies.