Effective Truncation of a Student’s.docVIP

Open Journal of Statistics, 2012, 2, 519-525 /10.4236/ojs.2012.25067 Published Online December 2012 (http://www.SciRP.org/journal/ojs) Effective Truncation of a Student’s t-Distribution by Truncation of the Chi Distribution in a Chi-Normal Mixture Daniel T. Cassidy Department of Engineering Physics, McMaster University, Hamilton, Canada Email: cassidy@mcmaster.ca Received September 25, 2012; revised October 27, 2012; accepted November 10, 2012 ABSTRACT A Student’s t-distribution is obtained from a weighted average over the standard deviation of a normal distribution, σ, when 1 ? is distributed as chi. Left truncation at q of the chi distribution in the mixing integral leads to an effectively ? ? truncated Student’s t-distribution with tails that decay as exp ?q t 2 . The effect of truncation of the chi distribution 2 2 in a chi-normal mixture is investigated and expressions for the pdf, the variance, and the kurtosis of the t-like distribu- tion that arises from the mixture of a left-truncated chi and a normal distribution are given for selected degrees of free- dom ? 5 . This work has value in pricing financial assets, in understanding the Student’s t-distribution, in statistical inference, and in analysis of data. Keywords: Asset Pricing; Student’s t-Distribution; Cauchy; Truncation; Moments; Kurtosis 1. Introduction Truncation, capping, and modification of the t-dis- tribution have been put forth as means to deal with the divergence [8,9,12]. Moriconi [8] multiplied the Stu- ? 2? to keep integrals dent’s t-distribution by an exp ?t A Student’s t-distribution is used for statistical inference for small sample sizes [1,2]. Nadarajah [3] states that the Student’s t-distribution is the second most popular dis- tribution, second in popularity only to the normal distri- bution. In addition to statistical inference, the Student’s t-dis- tribution has application in finance, wherein th