Morningstar - Q2 2020 - 44

fits the real return data.

Spotlight: Market Crashes

4

-10

2

EXHIBIT 2

Fat Tails in Canada As -15
with the U.S., the lognormal
-30%
0 curve of Canadian stock
15 returns has thin tails,30but the return data and
45
Monthly
Real
Return
log-stable curves have fat tails.

0

Alternative Distributions for Monthly Returns (CAD) on the S&P/TSX Composite Index, February 1956 -March 2020

Return Data

Lognormal

Log-Stable

Probability Distribution Function
12
The log-stable model for Canada's market returns
also accurately fits the market's return data
better than the lognormal model.

9

In Canada, the extreme left side of the log-stable model
fits the return data, while the lognormal distribution
misses it entirely.

6

3

-10

0
-20
-25%
Monthly Return

-15

-10

-5

0

5

10

15

20

Source: Morningstar Direct.

Peakedness
2.0
The reason that there are so many theories
ToJapan
see how well the log-stable model works as
return distributions that are fat-tailed and
ofSouth
theKorea's
business
cycle is that economists are
a Poland
model of stock market index returns of
left-skewed beyond what standard models predict.
market index has positive
South
skewness,into
meaning
its distribution
tilts
cou
tr Africa
es arou the orl , fitte t to the
divided
camps,
called schools
of economics,1.9
Italy
to the right. But its peakedness is below
Mexico returns of Morningstar stock
monthly
each
with
its
own
theory
of
the
business
Perhaps
it
is
time
to
reconsider
Mandelbrot's
work
2.0, indicating it has fat tails.
Peru
United Kingdom
Norway
Denmark (including the U.S.
market
on countries
cycle. These schools include (but are not limited
on the
price changes.4
France indexesAustralia
Turkey
Chiledistribution of
1.8
Brazil
Netherlands
Hungary Canada
to March
.
to) the Keynesian, Monetarist, New
and Canada) from July
SouthClassical,
Korea
India
Belgium
Hong Kong
United States
Switzerland
A Gaggle ofTaiwan
Economists
Austrian, and post-Keynesian schools. Here
New Zealand
Philippines
is a brief description of each school's business 1.7
E XThese
H I B Ieight
T 3 shows
The ups and downs of the capital markets are
countriesthe results as a scatter plot of the
have the most negative
Thailand
cycle
theory:
skewness
and
peakedness
parameters.
The
often
associated
with
the
ups
and
downs
Ireland
Indonesia
possible skewness,
Sweden
indicating extremely
of the economy. This is often called the businessMalaysia
peakedness
parameter for all countries is less than
skewed left tails.
1.6
, indicating that all of their returns have fat-tailed
cycle. Economists have developed various
Keynesian
Finland
Singapore
distributions. As for skewness, for all countries
explanations for the business cycle, perhaps too
According to the Keynesian school, economic
1.5
other than South Korea, the skewness parameter
many. Given how much economists always
uctuat o s are cause y cha es a re ate
-1.0
-0.8
-0.6
-0.4
-0.2
0
0.2
is negative. For eight countries (France, Japan,
disagree with each other, it is no wonder that
demand, which includes household consumption,
Skewness
in the
s, someone said, "If all economists
Italy, South Africa, United States, Mexico, Norway,
business investment, and government spending.
were laid end to end, they would not reach
and Poland), the skewness parameter is at
According to Keynesians, when aggregate
its most negative possible value, negative . All of
demand falls short and the economy goes into
a conclusion."5
a recession, the government should step in with
the remaining countries fall in a wide range
This is even more true today than it was then,
of values between and negative .
crease s e
to fill the a
h le oh
especially regarding competing theories of
Maynard Keynes started the Keynesian school
the business cycle. I refer to the proponents of the
This scatter plot shows that country stock market
with the publication of his book The General Theory
competing theories as a gaggle of economists.
indexes from around the world have historical
of Employment, Interest, and Money (Keynes

arko t has a ere t o t o e
ee arko t , a a e, a
a la
).
This quote is attributed to George Bernard Shaw in May
, but there is evidence that it was already in circulation by July

44

Morningstar Q2 2020

. See https://quoteinvestigator.com

economists/.


https://www.quoteinvestigator.comeconomists/

Morningstar - Q2 2020

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Morningstar - Q2 2020 - CT1
Morningstar - Q2 2020 - CT2
Morningstar - Q2 2020 - Cover1
Morningstar - Q2 2020 - Cover2
Morningstar - Q2 2020 - 1
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Morningstar - Q2 2020 - Contents
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