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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35 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 ...
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22 views

GRS TEST decision rule [closed]

I have a question regarding the interpretation of the GRS test. I have already looked into a question previously posed by some other users. One can find it here: how to interpret the GRS F test values?...
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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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27 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 ...
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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 ...
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47 views

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 ...
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54 views

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 ...
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87 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 ...
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88 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 ...
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2answers
81 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 ...
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160 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 ...
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1answer
68 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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73 views

Prove norm $\frac{1}{p}\sum_{i=1}^n |w_i|^p$ of min-variance portfolio $\leq$ max-Sharpe portfolio

The minimum-variance portfolio weight vector is $$\boldsymbol{w}_{MV} = \frac{\boldsymbol{\Sigma}^{-1} \boldsymbol{1} }{\boldsymbol{1}' \boldsymbol{\Sigma}^{-1} \boldsymbol{1}}$$ whereas the maximum ...
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138 views

Other statistical financial modeling textbooks like Risk and asset allocation by Attilio Meucci

I recently read about the book (Risk and asset allocation) written by Attilio Meucci and I found those statistical modeling and inference methods quite robust in my point of view, although there are ...
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40 views

Hierarchical copula vs. vine copula

Vine copulas are a sequential cascade of bivariate copulas meant to capture the hierarchical structure in the dependence structure of random variables. How does this relate or differ from the concept ...
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71 views

What should degrees of freedom $\nu$ be set to when modeling financial returns that follow the t-distribution?

The closer the t-distribution degrees of freedom ($\nu$) is to 0, the more heavy are the tails, whereas high degrees of freedom recovers the normal distribution. In finance, what value is usually used ...
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33 views

How to understand the results of the Johansen test?

So I now there are numerous pages on the johansen test, and what the results mean. Though I am confused as to what it is doing exactly. So my understanding is that it will find the spread of 2 ...
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51 views

Concentration of measure phenomena in financial mathematics

Concentration of measure is a small area of statistics and probability theory that proved inequalities regarding the statistical properties of sets of random variables that exclude one of those random ...
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1answer
91 views

sub-Gaussian random variables in financial economics

Unlike financial time series that typically possess fat tails, sub-Gaussian random variables have strong decay in the tails of their distribution. do sub-Gaussian random variables or processes appear ...
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194 views

Reinforcement learning in finance

In brief, what are some mainstream and recent applications of reinforcement learning in finance that fall outside of the usual scope of agent-based modeling?
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1answer
63 views

Someone help me understand why for portfolio variance or Parametric Value at Risk we have to compute the covariance matrix?

I understand that portfolio variance is computed through $w'Cw$, where w is the vector of weights, $C$ being the covariance matrix. However, what I don't get is this: why can't this portfolio variance ...
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107 views

What are some of the more Math-oriented professional certificates in Finance? (more math-oriented than CFA) [closed]

What are some of the more Math-oriented professional certificates in Finance? In particular, I'm interested in learning about professional certificates that are more Math/Statistics-oriented than the ...
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1answer
2k views

Calculating a Linear Weighted Moving Average in Python

Usually called WMA. The weighting is linear (as opposed to exponential) defined here: Moving Average, Weighted. I attempt to implement this in a python function as show below. The result is a list ...
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1answer
319 views

Implementation of Maximum Drawdown in python working directly with returns

I have a strategy on a stock (such as Buy and Hold) on which I have to calculate the maximum drawdown. The problem is that I'm working on returns expressed in percentages, so I do not have the time ...
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1answer
184 views

Issues making series stationary

I am trying to run some ARIMA forecasts and I switched recently from R to Python. I am struggling for some reason to make this series stationary . I try to take the log returns of stock prices as such ...
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2answers
78 views

How to use autocorrelation plot to interpret time series data?

how can we use auto correlation plot or correlogram to interpret time series data? I have 6 different acf plots (a,b,c,d,e,f), from this 6 plots what kind of informations and patterns can I identify? ...
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1answer
166 views

Is it always better to use the entire distribution of a financial returns series, not just $\mu$ and $\sigma$?

In finance models that use historical returns for inputs, including option pricing models, forecasting and portfolio optimization, only the statistical moments of the returns distribution, $\mu$ and $\...
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1answer
92 views

Creating a standard Gaussian model on stock market data

One of the big problems in creating good statistical models in the stock market is because of the long tails that deviate from Gauss' [regular] bell model, is there a way to create a synthetic Gauss ...
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54 views

Optimal Change Point Detection Problem for a timeseries

W. T. Ziemba, S. Lleo and M. V. Zhitlukhin suggested an Exit Model for selling an asset based on Change Point Detection Theory from the field of Statistical Quality Control https://ideas.repec.org/h/...
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1answer
29 views

How to evaluate prediction(s) made of the asset return mean?

In finance, it is well-known that the expected value of asset returns, $\mu$, otherwise known as the average return or mean or first statistical moment, is difficult to predict. I think it was ...
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87 views

Is there a scientific significance to Fibonacci numbers in economics?

I am new to the field and have read popular articles on Fibonacci numbers, but I did not find it grounded in academic research and would love to know if there is a research basis for this and whether ...
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24 views

Representing relative stock price predictions in portfolio optimization

I wanted to ask a simple question in representing mathematical concepts/terms into the portfolio optimization utility functions. I have never worked with these in production environment so I am very ...
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549 views

Quantitative finance for physicists

I am looking for good books to learn quantitative finance. As I have strong background in physics, I would appreciate introductions that do not hesitate to show the equations, but in the same time ...
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1answer
91 views

Overview of frequentist, likelihood and Bayesian approaches to finance problems

In quantitative finance tasks (asset pricing, portfolio optimization, option pricing, volatility forecasting, etc), there are frequentist, likelihoodist and Bayesian approaches or interpretations to ...
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13 views

A bounded random variable is sub-Gaussian, thus financial returns are not bounded?

Bounded random variables are sub-Gaussian, yet I, intuitively, assume financial returns are bounded random variables; however, they are not sub-Gaussian. Am I wrong to assume financial returns are ...
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1answer
106 views

Compute dZ(t) : Ito's formula/lemma

We need to find dZ(t). I know I have to use Ito's formula. But I am confused because in the Ito's formula we have f(y,t) is a twice differentiable function with two variables But here Z(t) = 1/(2+x(t)...
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1answer
71 views

Predicting time series based on another

This is more of a generic question, but I'm sure it has a best answer/methodology which is what I'm trying to reach. I'm trying to figure out a solid line of thought when looking at a time series X ...
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1answer
111 views

What is the R code for estimating copula parameters of BB1 with dim=2? And what's the code for gof test of BB1?

Kindly assist with R code for BB1 copula. Text books and research articles provide codes for clayton, gumbel, frank, normal and t copulas. However, I can't find code for BB1, the copula family ...
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2answers
725 views

Creating a Covariance Matrix

Lets say that you have the correlation of x,y and you have the standard deviations of x and y , how would you then find the covariance of x,y using the correlation of x,y and and the standard ...
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1answer
281 views

Markowitz portfolio in reality

I am in academia and begin to work on topics including portfolio optimization. I just read lots of paper discussing different extensions to the Markowitz approach, given different (possibly ...
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33 views

Asset prices Boom,Bust and Recovery cycles

Is there any systematic way to detect the Boom, bust and Recovery cycles in Asset Prices ? Are there any good references about the Topic ? Thanks in advance.
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46 views

Simulate option prices [closed]

Starting value = 3110.29 K = 3100 Trading days = 20 Need to simulate the price of an option by using these 2 methods. ( For homoscedastic errors ). *This is what I have already set up <...
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2answers
96 views

Cash flows regression on macroeconomic data

I'm looking into a research project and am struggling to find any existing work on this or whether I'm asking the right question. My question is to test the relationship between macroeconomic ...
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2answers
390 views

Fama/Macbeth Regression - negative estimate for market premium

I just conducted a Fama-Macbeth regression to estimate the risk premia of Mkt-Rf, HML and SMB. As a result, I got a negative risk premium for Mkt-Rf which makes no sense in my opinion. As I couldn't ...
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1answer
194 views

INTERPRETING PCA ANALYSIS

I am having little trouble figuring our which variables are the most important when I am using PCA . What I am trying to do is see which variables explain the most variance when it comes to stock ...
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1answer
182 views

PCA FOR STOCK PICKING

lets say I am an equity analyst and I want to figure out what fundamental metrics I should use when I am analyzing an industry , I can use pca on a bunch of stocks in an industry using their ...
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43 views

Correlation coefficient without cash flows?

I'm an intern at a company and one of our tasks is to calculate the the probability of default of both participants of a Swap(a Client and a Bank), for which we first need the correlation coefficient ...
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1answer
55 views

Asset return distribution

What is the basis for assumption that asset prices follow a log normal distribution? Then how is it transformed to say that asset return follows a normal distribution? How this relationship between ...
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1answer
98 views

Nelson & Siegel model (Fixed Income Securities)

I am well aware of the basic model formula and for what it is used, theoretically speaking, however I cannot find any concrete, problem solving exercises. Soon, I will have to deal with this problem ...
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2answers
124 views

Using cumulative returns to hedge against the overall trend

I am curious about a hypothetical strategy where you are long for a given period (like a year), and at the same time you hedge against the overall trend by going short everyday and accumulating the ...