Monte Carlo Distribution: Normal Vs. Laplace
What is the difference between a normal and Laplace distribution in Monte Carlo simulations? Which one should I use?
Although many random variables exhibit a normal distribution, equity and fixed income returns have exhibited a Laplace distribution over the past ten years. A Laplace distribution has fatter tails than a normal distribution, which increases the probability of extreme events relative to a normal distribution. In statistical terms, a Laplace distribution has kurtosis of 6.0, while a normal distribution has a kurtosis of 3.0. More information on these terms can be found here:
Laplace Distribution- http://en.wikipedia.org/wiki/Laplace_distribution
Are Stock Returns Normally Distributed?- http://www.dimensional.com/famafrench/2012/01/qa-are-stock-returns-normally-distributed.html
WealthTrace Blog Post- Monte Carlo Retirement Simulations in WealthTrace