Questions tagged [statistical-finance]

Statistical finance, which is also called 'econophysics' is the application of statistical tools to the study of financial markets data.

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Algorithms or references on how to detect and potentially remove jumps in stock returns

Sorry if this has been asked before. Thought this is a standard question but searching on web didn't give me too much useful links. Assuming a series of stock prices, how to detect and potentially ...
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Fama-French Regression Output Interpretation (Intercept/Alpha)

I am currently doing a report regarding Fama and French 3 and 5 factors model. I was provided 3 companies with each of its daily stock return from 2015-2020, and the values of all 5 factors during ...
NewbieFinance's user avatar
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How to calculate VaR given mean and sd?

Sarah manages a hedge fund with a portfolio valued at \$2,000,000. The portfolio's daily returns have a standard deviation of \$3,000 and an average daily return of \$1,200. Calculate the five-day VAR ...
Ankita Datta's user avatar
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Through-the-cycle rating transition matrix

Suppose we know the observed transition matrix for annual migrations between credit ratings, $T_{ij,t}$, for $N$ years. How is the through-the-cycle (TTC) transition matrix defined? Sometimes the ...
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Estimating implied probability based on prediction betting odds

I am attempting to estimate prediction betting market efficiency for a project, and I am hoping for assistance with a couple of questions. The prediction market makers add a commission to the betting ...
findingmyway's user avatar
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Statistical Arbitrage, Avellaneda & Lee - Estimation of the Residual Process

I am trying to calculate the trade signal outlined in Avellaneda & Lee paper "Statistical Arbitrage in the US Equities Market". They describe their approach in appendix. Here is my ...
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Fama Macbeth Regression: Culture and Momentum

I am attempting to replicate the work from "Individualism and Momentum around the World" (Shui, Titman, Wei, 2010, link) but I am not sure how to run a Fama Macbeth regression where the ...
Kamini Solanki's user avatar
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Can i use cross sectional absolute deviation to detect whether or not there is herding behavior in one specific year IPO

If I want to measure herding behavior of one specific year IPO, can I only use the initial return of every IPO stocks in that specific year for the CSAD regression?
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Advances in financial machine learning (Marcos López de Prado): explanation of snippet 3.1

I have been reading AFML ( Marcos López de Prado ) and I am having trouble understanding snippet 3.1 which provides the following code: ...
md0101's user avatar
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What color financial time series are there?

There is a folklore white noise hypothesis related to (and equivalent to some forms of) the efficient market hypothesis in finance -see references below. But are there some asset pairs whose return ...
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How to analyse the resilience of banks during financial crises using linear regression and other statistical methods?

I am a student in finance and have to work on a project for the semester. I have to study the difference of resilience during financial crises between the 5 biggest US banks and the 5 biggest Canadian ...
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Testing predictability of a proposed predictor in case of multiple returns

Say I have a T daily observations for the last ten years on a new predictor $x_t$ which I think is a predictor of the expected weekly return on the stock market, $r_{t,t+5} = r_{t+1}+...+r_{t+5}$, ...
wlsdnwlsntus's user avatar
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What are the parallels between the Black-Scholes equation and the heat equation?

I'm trying to understand the analogy between the Black-Scholes equation (1) and the heat partial differential equation (2). I understand that (1) can be written in the form of (2) mathematically, but ...
probablysid's user avatar
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Most famous research papers to get started in quant finance [duplicate]

I have a strong background in finance and I know how to code, but I am lacking the statistical modelling part. I have started courses in mathematics and statistics. However, it is turning out very ...
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How to identify daily returns as an unusual daily return given a dataset

I am currently calculating daily returns of a stock with the following formula: $$R_t = \frac{P_t - P_{t-1}}{P_{t-1}}$$ However, once I have the data, I am unable to establish a range to classify the ...
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Questions on constructing WML factor (Fama French)

https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html We can see that the Winner and Loser portfolios are determined by the cumulative return from t-12 to t-2. To construct the WML ...
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PCA on levels or returns, and standardized or not?

When you run PCA on some financial assets, let’s say stocks, do you calculate covariance on levels, standardized levels, returns or standardized returns? I’ve seen several papers and posts that ...
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How you explain that result?

I'm reading this paper : What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns? Yuhang Xing, Xiaoyan Zhang, and Rui Zhao∗ In section 2. A i found this equation: ... And ...
TheFutureIsQuant's user avatar
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Correlation with Differ Units of Measurement [closed]

I was wondering how to accurately get the correlation between a variable of percent change return and a variable of dollar change or basis points. Should I standardize both variables or will that lose ...
Deepankar Joshi's user avatar
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How sector PB ratio is calculated on ticker tape?

I know what PB ratio is and I am looking forward to calculate the sector PB ratio. Here's the sector PB ratio of State Bank of India is 2.23. Link The names of companies and its corresponding details ...
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Pairs trading - is regression done on log prices or log returns?

I'm getting into pairs trading (statistical arbitrage), but I keep finding different instructions on how it's done. Some sources (like this) run the linear regression (to find hedge ratio) on the log ...
Vladimir Belik's user avatar
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2-step system-GMM for static panel models?

Could we use the 2-step system generalized method of moment (GMM) for static regression models? As I know, 2-step system GMM is designed for dynamic panel data models but I see many papers use it for ...
Tina Ha Dinh's user avatar
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Adapted Roll measure implementation

I'm currently trying to implement the roll measure adapted by Easley et al. (2020, p. 22). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3345183 The adapted roll measure is given by the eq below....
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How does this book (Financial Theory w/ Python) arrive at the solution at the bottom?

I am trying to work through understanding this but I do not know how they got to the solution at the bottom (b*). Any help?
user13960146's user avatar
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Normalized statistical risk/reward measures to compare different quant trading strategy's returns, eg for backtesting

Want to select a metric or metrics to compare returns of different investment strategies, for quantitative backtesting, strategy selection, and forward measurement. Been reading different approaches ...
user2330237's user avatar
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How to explain the " no anticipation effect" testing result in Diff-in-Diff?

Regarding Difference-in-Difference, the main assumption is the parallel trend satisfication. Regarding the parallel trend test, just simply prove the joint null test of leads coefficients equalling to ...
Nguyen Lis's user avatar
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What is the probability of touching point A first?

The probability of a stock touching a point A which is below the current spot price is 35%, and the probability of the stock touching a point B which is above the current spot price is 20%. How can I ...
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Which distribution has higher VaR?

Let say I have 2 distributions with cdf $F_1$ and $F_2$. And I know that $F_1 \leq F_2$. With this information I know that $F_1$ has bigger lower tail than $F_2$ but I don't think this right away ...
Alejandro Andrade's user avatar
2 votes
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187 views

Fitting ARIMA + GARCH in R

I'm forecasting Electricity consumption Data. I have data for one year , so for every 15 minutes there is an observation. My data contains seasonality and I don't know how to fit SARIMA + GARCH into R,...
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3 votes
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How can momentum trading strategies work if returns are not serially correlated?

Returns are demonstrably not serially correlated in most financial time series (Day 1 returns are uncorrelated to Day 2 returns etc.) . Since this is the case, how can momentum trading strategies work?...
Vladimir Belik's user avatar
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Presence of underestimation bias in consensus earnings predictions

I am working on a financial data that entails forecasted revenue a company generates over a fiscal quarter and the actual revenue for that quarter. ...
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460 views

Geometric brownian motion small timesteps high volatility

I'm trying to generate some sample geometric brownian motion paths for an asset which is traded 24/7 without interruption and is highly volatile (upwards to 150% implied volatility on options markets)....
Experience111's user avatar
1 vote
1 answer
314 views

Fat tailed can be estimated through a t-distributions?

I have a simple question that makes me doubt a bit. In a multiple choise exam I ecountered this question: "if the stocks returns are not normally distributed, the fat tail effect can be estimated ...
gabriele's user avatar
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How to extract informative value from correlations of assets? Subadditivity of correlation calculation an issue

I was reading Nassim Taleb's Paper: Fooled by Correlation and found it very informative. I had always struggled with finding value in correlation in Finance, especially seeing a lot of bad ...
Kareem Sayed's user avatar
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182 views

Black-Litterman for quant portfolio

I have seen a lot of research around the Black-Litterman approach and I think theoretically, it is a nice framework. However, it appears that its main strength is from a practitioner's point of view, ...
Jim's user avatar
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Deriving Law of Motion by Ito's Lemma

I've been trying to derive the law of motion for the stochastic process above using Ito's Lemma, given Geometric Brownian Motion with it's law of motion shown below: I've managed to take the partial ...
Lachlan Dennis's user avatar
2 votes
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137 views

Backtesting of outperformance of a benchmark using the Deflated Sharpe Ratio

I want to test whether, let's say, strategy A outperforms strategy B. In Marcos López de Prado's book Advances in Financial Machine Learning he presents the following statistics: The Probalistic ...
tuffah12's user avatar
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Expected value of P&L based on option prices

How can we compute the expected value of P&L assuming the option price is given? Do we need to have more information to calculate P&L?
Ken's user avatar
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ACT/360 and business day convention interest question

The question I've been stuck is: We have a deposit of 10 million on 2011-04-01 for 7 days at 4 percent, assume T+2 settlement, calculated with ACT/365 basis and following business day convention. (04-...
nerdybean's user avatar
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194 views

Variance ratio test and ADF test for random walk

I am trying to use both ADF test and variance ratio test for random walk. However, the ADF test tells me my financial time series contains unit root, but variance ratio test (lo-mackinlay) rejected ...
Lin Lex's user avatar
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-2 votes
2 answers
161 views

What happens if my risk factor caught by statistical risk model using PCA turns out to be totally different from other PM's risk factor? [closed]

In order to explain systematic risk we use risk factors and I've learned that since they try to explain 'systematic' risk, risk factors are relatively well-known. However, what happens if the risk ...
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565 views

weekly returns and the daily returns scaled to weekly

I am new in this blog and first of all I want to apologise for my english. I have to calculate, for a university project, the weekly returns and daily scaled returns to weekly for few stocks For ...
gabriele's user avatar
1 vote
0 answers
32 views

Statistical testing of out-of-time portfolio performance (measured via a custom metric)

I'm testing (out-of-time) my machine learning (ML) based strategy against a strong benchmark. As a performance metric, I'm using a custom rolling metric $M(t)$ which takes into account the portfolio ...
BGa's user avatar
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How many principal components to use for statistical risk model?

If I use every principal component to explain total variance of my portfolio, does it still make sense in portfolio optimization? Because since alpha factors try to find out and explain unexplained ...
geonhwa's user avatar
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I require help to find a good data source for my thesis

I require help to find a good data source for my master thesis. I am doing a regression analysis for macroeconomic indicators and valuation multiples, for eurozone stocks. I need quarterly information ...
David Bock's user avatar
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162 views

Pairs Trading Strategy Pre-Selection

I am writing paper on the profitability of the pairs trading strategy using US equities. I have done a pre-check to see which business sectors have stocks that are cointegrated. The utilities sector ...
Kazi Mashrur Ahmed's user avatar
1 vote
0 answers
262 views

Pairs Trading (Cointegration Approach) - Daily Cointegration Test

I have a question regarding the Pairs Trading strategy based on the Cointegration Approach. Most of the papers/literature I found on Pairs Trading using the Cointegration Approach are usually testing ...
Rkl4397qa's user avatar
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2 answers
110 views

Best method to determine future success or to determine best linearity?

Long time viewer, but first time poster, so excuse me if i'm in the wrong place please. Anyway, I am working on a project that is pretty interesting. Through data mining, I am able to gather a ton of ...
nhb's user avatar
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1 vote
2 answers
309 views

Starting Point for understanding Financial Theory for a Statistician

I am a Master’s student in Statistics who is interested in the field of Financial Modelling. I have very little experience or knowledge of Finance and have mostly worked on introductory projects in ...
napoleon's user avatar
1 vote
1 answer
325 views

queue position value in all limits in the book

How would you evaluate the value of an order in a given limit at a given queue position in the order book ? For example let's say I am a market maker in BTC-USD and I would like to play some HFT games ...
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