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9
votes
1answer
373 views

Can Hurst exponent be used to characterize nonlinear dependence in time series?

It appears to me that the answer is no, because Hurst exponent measures persistence in terms of autocorrelation, which is a linear measure. So even if a time series of asset returns is driven by ...
6
votes
2answers
567 views

Why are regressors squared and not ^1.5 or ^2.2 or ^2.5?

When a researcher in economics or finance wants to apply a linear regression model but suspects a non-linear relationship between one of the regressors and the dependent variable, it is typical to ...
6
votes
1answer
137 views

How to perform risk budgeting for non-linear portfolios?

I am using this question to compute optimal weights following a risk budgeting approach. The problem is I am using non-linear portfolios (options,equity,fixed income,fx). What I am looking for is ...
6
votes
0answers
93 views

Is Least Median Squares (LMS) regression commonly used in Finance?

Least Median Squares is often argued to give more stable results than does OLS. Whereas in OLS one minimises the mean of squared residuals, in LMS, one instead minimises the median of squared ...
5
votes
2answers
196 views

How does the number of free dimensions of a model affect its required size of sample?

Adding more variables to a model usually increases its accuracy. However, without adequate analysis it could also lead to curve fitting. Another question (How much data is needed to validate a ...
1
vote
1answer
359 views

Non-linear Dynamical Systems and Quantitave Finance

The vast majority of what I have read about quantitave finance is to do with option pricing and time series analysis for forecasting. However the economy as a whole behaves as a dynamic system with ...
1
vote
0answers
93 views

Calculating the Hedge Ratio

Suppose we have an index whose value is calculated by a weighted geometric mean. Now we want to recreate the index using its underlying components. How would we go about calculating the hedge ratios ...