Market Efficiency, the Pareto Wealth Distribution, and the Lévy Distribution of Stock Returns
The Pareto (power-law) wealth distribution is a robust consequence of a fundamental property of the capital investment process: it is a stochastic multiplicative process. This distribution implies that inequality is driven primarily by chance, rather than by differential investment ability. This chapter shows that the Pareto wealth distribution may explain the Levy distribution of stock returns, which has puzzled researchers for many years. Thus, the Pareto wealth distribution, market efficiency, and the Levy distribution of stock returns are all closely linked.
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