Questions tagged [econometrics]

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30
votes
5answers
5k views

Why aren't econometric models used more in Quant Finance?

There is a big body of literature on econometric models like ARIMA, ARIMAX or VAR. Yet to the best of my knowledge practically nobody is making use of that in Quantitative Finance. Yes, there is a ...
21
votes
3answers
4k views

What is the necessary level of Econometrics-Know-How for a quant

It seems quants increasingly use econometric models at work. As someone who has sold his soul to probability theory and stochastical analysis I would like to catch up. What are the econometric tools ...
18
votes
1answer
2k views

So many volatility models. Any comparisons of them?

Are there any papers that make an explicit contrast/comparison of the following (or other) vol models in terms of the suitability for addressing some empirical problem? Wavelet multiresolution ...
15
votes
6answers
19k views

Why non-stationary data cannot be analyzed?

Searching online, i found out that non-stationary cannot be analyzed with traditional econometric techniques as in case of non-stationarity some basic model assupmtions are not met and correct ...
15
votes
2answers
228 views

Quantitative features of asset price bubbles beginning

Surprisingly, I've found very little research on this topic. Research papers I've come across propose some simple models to say that asset prices might be in a bubble. Most of the models take these ...
14
votes
2answers
426 views

Is a linear combination of GARCH processes also a GARCH process?

If two time series follow a GARCH process, and a third is a linear combination of them, is the third also GARCH process?
12
votes
3answers
681 views

What is a commonly accepted econometric model for volume?

What is the gold standard econometric model for volume? For example, a common model for price is the autoregressive (AR) model with GARCH(1,1) innovations. Do you know of any good survey articles ...
12
votes
2answers
1k views

What is the precision of standard deviation estimates with small samples?

I was asked today to "quantify" the precision of an estimated the standard deviation from a small sample, I was not sure how to answer. The case is quite simple, I have a sample of $n=25$ measures (...
9
votes
2answers
3k views

What are common methods for modeling intraday trading volume?

What are the most common ways to model intraday trading volume, particularly for futures contracts? There are obviously a number of seasonal-type factors, like roll, economic news releases, time of ...
9
votes
2answers
3k views

What are the econometric assumptions in the Fama-Macbeth procedure (1973)?

Fama-Macbeth (1973) introduce a two stage cross-sectional regression method (http://en.wikipedia.org/wiki/Fama%E2%80%93MacBeth_regression). 1) If I was to regress stock prices (or returns) on a ...
8
votes
1answer
675 views

How to model time series of illiquid stocks - 400 observations (transactions) per 8 hours?

How to model time series which are illiquid - 400 observations (transactions) per 8 hours ? Are there models suitable for this situation which incorporate not only size of the transactions but also ...
8
votes
3answers
7k views

How to detect and adjust for stock splits? [duplicate]

I am using a large daily data panel for over 250 companies and over several years. I am concerned about adjusting for stock splits. Is there any program in SAS to detect stock splits? How do I adjust ...
8
votes
2answers
307 views

Testing for stock market herding over short periods

The literature has well established methods for testing stock market herding over a decent time window. Are there any ways that have appeared in the literature to test for stock market herding over ...
8
votes
1answer
933 views

Do intraday volume and volatility share the same properties?

volatility clustering and mean reversion are very well known properties that one could use when trading. Traders, especially in options world, do take realized vol into account (e.g. by forecasting it ...
7
votes
2answers
644 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 ...
7
votes
2answers
5k views

What's the meaning of the intercept in asset pricing model?

I would like to understand the role of alpha (intercept) in the regression-based asset pricing model or $n$-factor models; one of the most famous of those one is the Fama-French 3-factor model. ...
6
votes
4answers
9k views

relation between asset's and equity volatilities - merton model

In terms of Merton credit risk model need to find the initial value of counterparty's assets and the volatility of the assets. Both value are not directly observable thus we have to approximate them ...
6
votes
2answers
267 views

Which quantitative tools are actually used for hedging energy price and volume risk?

I'm a finance professor and I am looking for someone with actual trading and risk management knowledge within the energy sector who can tell me about pricing and hedging energy (especially electricity ...
6
votes
1answer
725 views

Momentum - skipping the most recent month

Many momentum studies skip the most recent month when calculating momentum to account for "reversal effects." On the other hand, I've read online that some people get better results from not skipping ...
5
votes
1answer
1k views

Financial economics vs finance [closed]

What is the difference between financial economics and finance? How does affect career options as well as academic opportunities?
5
votes
1answer
3k views

Fama Mac-Beth (1973) vs Fixed effect

Currently testing if monthly fund characteristics (size, capital flows, age, risk, persistence,...) explain funds abnormal returns. My data is set as a panel with 1000 equity mutual funds over the ...
5
votes
4answers
1k views

Regressor: Nominal return, continuous return or first difference?

Suppose the application is linear models in financial econometrics. If we want to analyze stocks, the standard approach is to take the continuous/log return: $\ln{ \frac{P_t}{P_{t-1}} }$. Suppose, ...
5
votes
2answers
183 views

Economic contagion to individual stocks (ideas for analysis)

I'm doing my undergraduate thesis on firm-level contagion. Specifically I look at a measure of performance over a financial crisis (e.g. raw stock returns), then run cross-sectional regressions with ...
5
votes
1answer
271 views

Panel data - Use fixed effect or random effect in predicting stock returns

I'm currently writing a master thesis where I look at the predictive power of Google search volume in predicting the movement of the Norwegian Stock Market (Oslo Børs). I'm using Google search volume ...
5
votes
2answers
147 views

Is there a relation between these two forecasting/estimation approaches?

When learning econometrics I have usually seen stuff from the following perspective: Assume $Y_t = f(X_t) + e_t$, where f is some function of $X_t$ (typically linear). For example, assume $Y_t = X_t *...
4
votes
1answer
356 views

What is the stambaugh bias? Why is it important for predictability regressions?

What is the Stambaugh bias? Why is it important for predictability regressions? Can anyone explain it in simple terms?
4
votes
3answers
670 views

Transaction Data with Participant ID

For my master thesis, I need high-frequency data with the market participant ID or which identifies the trading parties, respectively. I don't need the entire orderbook but just the matched orders ...
4
votes
2answers
891 views

What is time-varying risk premium? Forecasting stock returns

I am trying to understand the concept 'Time-varying aggregate risk premium'. Here is an extract from a Forecasting book, written by Rapach and Zhou, "However, rational asset pricing theory posits ...
4
votes
1answer
702 views

How to apply Levenberg Marquardt to Max Likelihood Estimation

In this paper on p315: http://www.ssc.upenn.edu/~fdiebold/papers/paper55/DRAfinal.pdf They explain that they use Levenberg Marquardt (LM) (along with BHHH) to maximize the likelihood. However as I ...
4
votes
1answer
224 views

What return equation is Engle referring to in his Nobel lecture?

Engle comments in "Risk and Volatility: Econometric models and Financial Practice" that If the price of risk were constant over time, then rising conditional variances would translate linearly ...
4
votes
1answer
220 views

Fixed Income free research available online

As from the title, I would like to know where it is possible to find free research focused on fixed income markets' themes and topics, such as interest rates, credit risk related fundamentals, new ...
4
votes
3answers
2k views

Any package to run VAR-GARCH or VECM-GARCH models in R?

I need to estimate a multivariate VECM-GARCH (or simply VAR-GARCH) in R. Browsing on the internet, I did not find anything yet. Do you know if such kind of packages exists? Please, note that a BEKK ...
4
votes
2answers
382 views

Back-testing Value at Risk with a WML investment strategy

I'm currently taking a course in Financial Econometrics and there is a question in the lecture notes regarding back-testing of VaR which I'm have difficulty with. First of all the procedure for back-...
4
votes
1answer
59 views

How to prove that the expected squared error associated with the optimal combination weight is smaller than the minimum of 2 forecast variances?

I am looking at linear combination of two forecasts (Bates and Granger, 1969). I would like to understand how to prove that the expected squared error associated with the optimal combination weight is ...
4
votes
2answers
176 views

Lagged Residual as Independent Variable

I am building a factor model to estimate future equity returns. I'd like to include an autoregressive residual term in this model. I'd like to have yesterday's error (the difference between yesterday'...
4
votes
0answers
263 views

Fourth moment of ARCH(2)

I am studying the ARCH(2) process given by $$X_t = \sqrt{h_t} \varepsilon_t$$ where $$h_t = \alpha_0 + \alpha_1 X_{t-1} ^2 + \alpha_2 X_{t-2} ^2$$ and $\varepsilon_t$ follows $N(0,1)$. ...
3
votes
2answers
1k views

Choosing the right statistical test for Mutual Fund Performance Evaluation

How do you suggest I do this? I would like to perform a statistical test to check if: the aggregate alpha of all funds equals 0. the aggregate beta of all funds equals 1. Data Sample of 1000 ...
3
votes
1answer
472 views

Econometric vs ANN models for forecast?

I hope this is an appropriate question for this forum... for me it is an obvious query since it intrigues me for a long time. Ok, assume there are 2 distinct classes of models: econometric (AR, MA, ...
3
votes
2answers
255 views

Fama and French (market premium) factor

Currently I am using the Fama and French 3 factor model to explain the performance of mutual funds using monthly returns from 2000 to 2017. I use two market proxies: (1) RM-RF, obtained directly ...
3
votes
5answers
216 views

economic facts that causes the financial time series to be heavy tailed

When reading a tutorail on extreme value theory, I once meet the following claim ...
3
votes
1answer
2k views

How to compute a Fama-Macbeth R-Squared (R2)?

I'm reaching out regarding the R-Squared of a Fama-Macbeth regression. This is often reported in econometric results but I have yet to find a good explanation of how it is computed. Specifically, if ...
3
votes
1answer
584 views

rollapply with Arima model: testing for stability of coefficients

I am trying to fit an arima model on a rolling window using rollapply.My aim is to plot a graph of the evolution of the coefficient, plot the error and the standard deviation. well i encountered the ...
3
votes
1answer
103 views

End Dates of Financial Crises

I am analyzing past financial crises, comparing the correlation structure amongst 20 broad market indices (equities, FX, credit, commodities) during different crises using amongst other things PCA and ...
3
votes
1answer
2k views

Interpreting the coefficients of Fama-MacBeth regression

According to Fama & MacBeth (1973) two-step regression, you start with estimating the beta factors. When applying the Fama-French 3-Factor model, you first run the linear regression $$r_{i,t}=α_i+...
3
votes
1answer
324 views

Criticise GARCH relative to Realized Volatility

I would like to have your opinion about a simple question. While GARCH would be useful to calculate the conditional volatility, and the RV being in some sense the "historical" volatility, what would ...
3
votes
1answer
2k views

How to implement dummy variables into GARCH(1,1) model from structural breaks (ICSS)

Hello everybody, I was already searching a lot of forums and read a huge amount of different papers. But I guess I am to stupid or I am at a loss. Hopefully some of you are able to help me out. Here ...
3
votes
2answers
735 views

How to compare different volatility measures?

I read the Euan Sinclair's book (Volatility trading) in which he suggests different volatility estimators (Close-to-close, Parkinson, Garman-Klass, ...). I am inquiring about what is the best stock ...
3
votes
1answer
291 views

Why are there different estimators for stock volatility? (realized variance, RAV, etc)

I am very confused about why different volatility estimators (RV, RAV, BPV, etc) exist. If the goal is to find the best estimator for stock volatility, and volatility is latent, how do I know which ...
3
votes
0answers
48 views

Annualization of higher order Co-moments

I'm developing a dynamic portfolio optimization procedure based on the implementation of the Modified sharpe ratio. The mentioned ratio depends, among other factors, on the skewness and kurtosis of ...
3
votes
0answers
418 views

Can a stat arb alpha be a global macro alpha?

In academic literature, "statistical arbitrage" is opposed to (deterministic) arbitrage.[1] In deterministic arbitrage, a sure profit can be obtained from being long some securities and short others. ...