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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Applications of distance correlation

This question mentions distance correlation. Where has this concept been applied to financial data and provided new insight? Do you know any examples or references?
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5 votes
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Is it more accurate to analyze returns on a calendar day basis than a trading day basis?

I'm rather new to the actual practice of this kind of analysis, but it just seems wrong to me to throw Mondays' returns in with the rest without accounting for the passage of time on the weekend when ...
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4 votes
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129 views

Which areas of statistical physics do not get enough attention in quantitative finance?

It seems that over the past few decades many ideas from statistical physics have been successfully incorporated into economics and finance to form the sub-discipline of econophysics. However, it is ...
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3 votes
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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 ...
3 votes
1 answer
202 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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3 votes
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85 views

Test for difference in security returns before and after financial regulation

I'm going to study the effect of corporate credit rating changes (Moody's) on stock prices before and after a specific financial regulation. So far i have used an event study where i have divided the ...
3 votes
0 answers
120 views

Optimize an equity portfolio for the four central moments: problem formulation

Basically i am confused as to which formula to use for portfolio skew and kurtosis and how to use the same in the optimization problem. I would also like to know the options available regarding the ...
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2 votes
0 answers
97 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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2 votes
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67 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 ...
2 votes
0 answers
34 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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2 votes
0 answers
186 views

How to conduct an event-study for a single index (i.e the DJIA) with multiple events

I am a postgraduate student writing my thesis. I am somewhat a novice in the field I have chosen to study, however this has undoubtedly broadened my horizons. I am attempting to evaluate the impact of ...
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2 votes
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40 views

Rolling sum of conditional variance

I have a model to compute the conditional expectation and variance for a return series, given various factor returns. Initially attempted to trade the deviations of actual return for the day from the ...
2 votes
0 answers
334 views

Frequency Arbitrage

We know that the volatility is lower when the sampling period is longer, for example $\sigma_{7days} < \sigma_{1day}$, Then I came across this strategy that I cannot quite understand how to exploit ...
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2 votes
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147 views

Negative constant in GARCHX model

I am fitting the following ARX(1,1)-GARCHX(1,1,1): \begin{align*} y_t&=c+a_1y_{t-1}+\gamma_1x_t+\varepsilon_t\\ h_t&=\delta+\omega_1h_{t-1}+\theta_1\varepsilon_{t-1}^2+\pi_1x_{1,t} \end{align*...
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1 vote
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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
0 answers
54 views

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....
1 vote
0 answers
80 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 ...
1 vote
0 answers
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 ...
1 vote
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40 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. ...
1 vote
0 answers
74 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 ...
1 vote
0 answers
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
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58 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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1 vote
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164 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 ...
1 vote
0 answers
97 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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1 vote
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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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1 vote
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74 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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1 vote
0 answers
104 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 ...
1 vote
0 answers
26 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 ...
1 vote
0 answers
35 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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1 vote
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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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1 vote
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47 views

How to implement Time varying EWMA cross correlation in STATA?

I have read this question, I know about lambda, demeaned subindexes. But not able to implement in STATA?
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1 vote
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37 views

How to count [and report] the values of significance at 1% and 5%?

I am slightly confused with this: I have calculated the Chi square for the number of funds and the methods description tells me that if the values I have calculated are greater than 3.84 (6.64) that ...
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1 vote
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45 views

Is there a quantitative definition of a Quiet, Moderate or Accelerate market conditions?

i know the StdDev price technical indicator which is the standard deviation but this one has an absolute value. The market conditions are: Quiet: lower oscillation of price around a constant ...
1 vote
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60 views

Log likelihood function, GARCH(1,1) with asymmetric term

I am modelling a GARCH(1,1) and a GARCH(1,1) with an asymmetric term. $$h(t)=\omega+\alpha\varepsilon(t-1)^2+\beta\sigma(t-1)^2$$ and $$h(t)=\omega+\alpha u(t-1)^2+\beta\sigma(t-1)^2 + \gamma (u(...
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Pricing methods in the real world when there is more than one free arbitrage price

Perhaps this question sounds trivial and obvious, but I am starting to study this new field. When we are in a complete market without arbitrage opportunities there is only one risk-neutral martingale ...
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1 vote
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88 views

Dubious math in Thorp's magnum opus

I started reading Thorp's "Beat the Market" book and stumbled on a formula I can't figure out: https://imgur.com/a/xqfViKt What's the point in adding time to price and the whole probabilites ...
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1 vote
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106 views

Kelly's maximum for G(f)

In Thorpe's paper, Thorpe derives the Kelly criterion $$f^* = p - q$$ and plugs this into the equation $$G(f^*) = p \times \log(1+f^*) + q \times \log(1-f^*)$$ to get the following expression $...
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1 vote
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51 views

Tail index estimation to prove non-stable fat tail distribution

Currently I am analysing the stylized facts for some EURO FX rates. This paper states that we can prove the fat tail distribution of the FX log returns via the computation of the tail index. For a ...
1 vote
0 answers
459 views

Cross-sectional Regression: Using calculated coefficient of first regression for a second regression as dependent variable

Hello stackexchange community! I am new to R and econometrics and and stuck in a step of the fama-macbeth (1973) regression, in which risk premia of stocks are estimated with a two-step regression ...
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1 vote
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243 views

ISM PMI data - sector trend through ranking and seasonal decomposition

I have monthly data for each of the 18 sectors in the ISM PMI. Each datapoint shows the trend of a sector: growing, contracting or neutral. It also tells the strength of that trend with a number: "...
1 vote
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75 views

Modelling turnovers with a random walk. Is it right?

I need to analyse a bunch of weekly time series that reflect the turnovers of various companies. I already read that return rates or share prices show stochastic patterns that can be modelled by a ...
1 vote
0 answers
571 views

Using the R package " termstrc "

I am attempting to use the function estim_nss from the termstrc package in R. However, I am experiencing the following error: ...
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46 views

Is not handling irregularity (unevenly spaced time intervals) in stock market intra-day data ok?

I read papers and it seems not doing anything to unevenly spaced time series is the implicit common sense (apart from routine preprocessing, which has nothing to do with time interval handling) for ...
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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 ...
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73 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 ...
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0 answers
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'...
0 votes
0 answers
28 views

Factor Loading Precision/Details in Fama-French 3 Factors Model

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 ...
0 votes
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183 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 ...
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0 votes
0 answers
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 ...
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124 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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