Cauchy, Normal and Correlations Versus Heavy Tails

A surprising result of Pillai and Meng (2016) showed that a transformation ∑j=1nwjXj/Yj of two iid centered normal random vectors, (X1,…,Xn) and (Y1,…,Yn), n>1, for any weights 0≤wj≤1, j=1,…,n, ∑j=1nwj=1, has a Cauchy distribution regardless of any correlations within the normal vectors. The correlations appear to lose out in the competition with the heavy tails. To clarify how extensive this phenomenon is, we analyze two other transformations of two iid centered normal random vectors. These transformations are similar in spirit to the transformation considered by Pillai and Meng (2016). One transformation involves absolute values: ∑j=1nwjXj/|Yj|. The second involves randomly stopped Brownian motions: ∑j=1nwjXj(Yj−2), where {(X1(t),…,Xn(t)),t≥0},n>1, is a Brownian motion with positive variances; (Y1,…,Yn) is a centered normal random vector with the same law as (X1(1),…,Xn(1)) and independent of it; and X(Y−2) is the value of the Brownian motion X(t) evaluated at the random time t=Y−2. All three transformations result in a Cauchy distribution if the covariance matrix of the normal components is diagonal, or if all the correlations implied by the covariance matrix equal 1. However, while the transformation that Pillai and Meng considered produces a Cauchy distribution regardless of the normal covariance matrix, the transformations we consider here do not always produce a Cauchy distribution. The correlations between jointly normal random variables are not always overwhelmed by the heaviness of the marginal tails. The mysteries of the connections between normal and Cauchy laws remain to be understood.