# 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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79 views

### 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 ...
79 views

### 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 ...
114 views

### 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 ...
1 vote
24 views

### 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 ...
1 vote
48 views

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....
65 views

### How to know if I have enough OHLC price data to backtest a trading strategy (short term desired)?

Here's my situation, I have a big dataframe that contains 248 days of OHLC price data set at 1 hour timeframe (i.e. 24 rowsperday * 248 days = 5952 rows). The ...
50 views

### Event study individual day Abnormal returns in STATA

I am conducting an event study, testing the abnormal returns for a sample of 39 companies and a single event (April 29 2009). Currently, I am calculating the ARs using the FF 3-Factor Model and the ...
37 views

### How do I perform the regression analysis? Do I need to create a Panel Dataset?

I am currently trying to replicate a regression from the 2015 paper "Science and the stock market: Investors' recognition of unburnable carbo" by Griffin et al. It analyzes oil and gas firms'...
113 views

### 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?
1 vote
68 views

### 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 ...
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1 vote
36 views

### 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 ...
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24 views

I have a few questions regarding details about FF3F model. In the equation like following, $$E(R_P)-r_f = \alpha +\beta_M[E(R_M)-r_f] + \beta_SSMB + \beta_V HML$$ Are SMB and HML factors are ...
174 views

### 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 ...
44 views

### 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 ...
91 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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369 views

### 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?...
1 vote
39 views

### 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. ...
51 views

### Covariance of ARCH(2) model

I am having problems solving the following exercise: The solution is the following: I understand we are calculating E(r^2t) and E(r^2tr^2t-1) because they are part of the covariance formula, and ...
155 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)....
1 vote
174 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 ...
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1 vote
70 views

### 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 ...
116 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, ...
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1 vote
126 views

### 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 ...
66 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 ...
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80 views

### 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?
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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-...
107 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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### 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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209 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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1 vote
27 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 ...
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1 vote
56 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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103 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 ...
125 views

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 ...
1 vote
152 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 ...
97 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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1 vote
249 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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1 vote
162 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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1 vote
92 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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152 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 ...
1 vote
66 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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187 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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1 vote
69 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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173 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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1 vote
272 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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133 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 ...
206 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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1 vote
4k 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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1k 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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