New answers tagged statistics
It sounds to me like you have a Markov model that is not "lumped", it's just that certain transitions don't provide you with any payout. I would model the true transition probabilities. Now, let's ask what the probability of getting a one is, assuming that we won't stay at zero, i.e. $P(X_1=1 | X_0=0, X_1 \not = 0)$. We recall that $$P(A|B)=P(A,B) / P(B)$$ ...
The following paper gives you a step-by-step presentation of how to use the Kalman filter in an application in a pricing model framework for a spot and futures market. Everything is explained using Excel: A Simplified Approach to Understanding the Kalman Filter Technique by T. Arnold, M. Bertus and J. M. Godbey
1) Analysis of Financial Time Series by Ruey Tsay 2) An Introduction to Bayesian Inference in Econometrics by Arnold Zellner Not finance specific, but this is the best multivariate stats book I know of: 3) Applied Multivariate Statistical Analysis by Johnson and Wichern
Elements of Statistical Learning by Hastie, Tibshirani and Friedman is one of the most-cited books for your purpose. Although it does not have any direct applications to Finance, this is definitely a good book to have in your professional library and can be used as a reference for most topics. If you want to use a book with more financial applications, I ...
I think a good book to start in your case is: Attilio Meucci: Risk and Asset Allocation I once had a seminar held by Attilio that was based on the book and it blew my mind. The book is very intuitive yet rigorous.
I would highly recommend this books: Mathematics and Statistics for Financial Risk Management: Book 1 The other one, is Chapter three from, Practical Methods of Financial Engineering and Risk Management: Tools for Modern Financial Professionals: Book 2 Hope it helps.
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