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The Market-Based Probability of Stock Returns

Olkhov, Victor (2023): The Market-Based Probability of Stock Returns.

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Markets possess all available information on stock returns. The randomness of market trade determines the statistics of stock returns. This paper describes the dependence of the first four market-based statistical moments of stock returns on statistical moments and correlations of current and past trade values. The mean return of trades during the averaging period coincides with Markowitz’s definition of portfolio value weighted return. We derive the market-based volatility of return and return-value correlations. We present approximations of the characteristic functions and probability measures of stock return by a finite number of market-based statistical moments. To forecast market-based average return or volatility of return, one should predict the statistical moments and correlations of current and past market trade values at the same time horizon

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