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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4
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1answer
148 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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2answers
185 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 ...
3
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1answer
64 views

Exposure/Factor Analysis on a loan portfolio?

I am working on performing factor analysis on a loan portfolio. This is my understanding so far, and I was hoping that some of the smart folks here might be able to chime and guide me through this ...
2
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2answers
50 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 ...
2
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1answer
235 views

What is the fastest common moving average?

I am trying to find what standard moving average would give me the fastest adjustment or strongest weight to most recent data, but without changing the number of periods. Here is some sample data and ...
2
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4answers
15k views

Are PX_BID and PX_ASK on Bloomberg closing bid/ask? or are they daily averaged?

Bloomberg provides PX_BID and PX_ASK on a daily basis, but it's not clear exactly where these numbers come from. Are they closing bid and ask prices, or are they averaged over the entire day? For ...
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1answer
68 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 ...
0
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1answer
88 views

How to apply derived beta to daily change?

I've taken three months of price return data for two instruments and calculated a $\beta$ between the two using the formula $\beta = \frac{Cov(x,y}{Var(y)}$ with the goal of estimating what the ...
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0answers
31 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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0answers
44 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 <...
0
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1answer
162 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
138 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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0answers
42 views

Pca for Portfolio Theory

given the fact that if you take the portfolio returns for different assets in a portfolio the first principle component represents the market exposure of the portfolio and the second principle ...
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0answers
40 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
37 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 ...
1
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1answer
76 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 ...
3
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2answers
115 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 ...
2
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0answers
45 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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0answers
18 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?
2
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1answer
56 views

Why is the CAPM Beta defined this way - Beta hedging

Let's say I have two equity indices X and Y. Assume they are negatively correlated with some leverage. I want to hedge X with Y. I have seen many ways of computing a beta to describes the ...
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0answers
22 views

Operational Risk Loss Distribution with Insurance

** Referring to part (c) First is 5000. Am I supposed to replace the 8000 with 5000 while maintaining its probability? For the second part, which includes the cost of insurance, do I add it to the ...
1
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1answer
44 views

Show that the variance of the market portfolio is the weighted average of the ovariances between each constituent and the market portfolio itself

Let us assume that the market portfolio consists of n assets. Given that the return of the market portfolio can be written as $r_m = \sum_{j=1}^{n} w_jr_j$, we have that $\sigma^2_m = E(\sum_{j=1}^{n} ...
2
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1answer
99 views

Assessing goodness of a Technical Trading Rule using a ROC model

I am testing various technical trading rules (TTR) on the cryptocurrency market. I have already setup some significance tests, to compare the returns and volatilities. I would now like to test it ...
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0answers
60 views

Scenario Analysis - Real life application

Given a portfolio consists of Stock = usd 40, Bond = usd 40, commodity =usd 20. Also given the correlation between these assets. Scenario 1 : stock down by 30% When performing scenario analysis, do ...
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0answers
21 views

Show that the variance of the portfolio market portfolio is function of the betas of its consituents [closed]

Let us assume that the market portfolio consists of n assets. Given that the return of the market portfolio can be written as $r_m = \sum_{j=1}^{n} w_jr_j$, we have that $\sigma^2_m = E(\sum_{j=1}^{n} ...
0
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0answers
35 views

Need help figuring out probability that price will be touched in a specific time period

I have a formulas for figuring out probability the price will be struck within T days. Now what I need help with is figuring out the probability price will be stuck with in a given (T) minutes, or (T) ...
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0answers
30 views

Statistical procedures on comparing the four Asset pricing models [closed]

I'm a business student and currently writing my thesis on comparing asset pricing models on industry portfolio returns. Being a business student, I lack the knowledge for statistical analysis ; so I ...
7
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0answers
259 views

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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0answers
44 views

Decomposition of interest rate risk [closed]

Hi I needed some clarification on something. I have three variables: V1 which is an indicator of an interest rate risk premia V2 which is an indicator of a credit risk premia V3 which is an ...
1
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1answer
61 views

Cross Product Ratio Analysis

Can you please advise? I have been recently trying to sort this out for couple of days but cannot get the same numbers as previous authors: The equation is shown in Agarwal and Naik Multi-Period ...
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0answers
38 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 ...
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0answers
32 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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2answers
2k views

Implied Volatility of stock on Think or Swim

Think or swim has this thing where they have do a implied volatility of a stock. I have chatted with the TOS people but they aren't terribly helpful. Regardless they did send me two images of what ...
1
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0answers
39 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(...
2
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0answers
23 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 ...
1
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1answer
108 views

How did Dickey and Fuller know something was wrong?

I am interested in testing if there is size distortion through simulations. I have recently been interested in replicating Dickey and Fuller (1979) and this source from another post helped a lot, here ...
1
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1answer
102 views

Most profitable? High % but low probability or Low % but high probability

I have identified a pattern in different assets where a quick spike/flash crash often occurs, dropping the price between -5% and -15% for a few seconds and then going back to previous average. I am ...
3
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2answers
144 views

Statistical estimation vs Stochastic calibration of models

I have never been able to deduce the precise differences between model building from the statistical perspective and the stochastic processes/calibration perspective. I can only infer that these are ...
1
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0answers
59 views

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 ...
1
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1answer
2k views

Fama MacBeth cross-sectional Regression

I am deeply confused right now and hope someone can help me out a bit. I want to replicate part of a paper from Fama/French (2008), Dissecting anomalies, specifically, Table IV "Average Slopes and t-...
2
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2answers
153 views

Utility functions, are they used in the real world by hedge funds, banks, etc?

I am starting to study mathematical finance. When I studied microeconomics and macroeconomics I studied utility functions, but I never saw how they are in the real world. I do not see how they can be ...
3
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0answers
93 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 ...
2
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1answer
146 views

Showing the Gaussian shift theorem for bivariate case

I was reading about the Gaussian shift theorem in "An Introduction to Exotic Option Pricing" by Peter Buchen and came across a question that I can't seem to figure. In the book, he uses F(Z) (a ...
7
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1answer
727 views

Does Chan use the wrong state transition model in his Kalman filter code?

In his book, Algorithmic Trading: Winning Strategies and Their Rationale, Ernie Chan shows how to use a Kalman filter to improve the returns of a cointegrated portfolio. Recall that the state equation ...
4
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2answers
1k views

What are the assumptions in the first-stage of Fama-MacBeth (1973)?

According to the CAPM, the expected return of asset $i$ is: $E(Z_i) = \beta_{im} E(Z_m)$ where $Z_m$ is the excess return on the market portfolio, and $Z_i$ is the excess return of asset $i$ over ...
2
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1answer
345 views

CAPM Calculations

Im trying to calculate Alpha using CAPM & I have data on everything necessary. $$R_t-R_f={\alpha}+{\beta}\times(R_m-R_f)$$ i.e. $${\alpha}=R_t-R_t-{\beta}\times(R_m-R_f)$$ In more detail, I ...
18
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10answers
9k views

Usage of Random forests in Quantitative analysis of stocks

I have a question about Random forests and how they could be utilized in trading? I heard Random forests are used for classification, is that accurate? If so, could someone give an example of what ...
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0answers
77 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 ...
2
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1answer
102 views

Asset class dynamics differences

If we compare daily return dynamics of the main asset class time series (e.g. Stock indexes, bonds, precious commodities, etc) do we observe quantifiable differences? Are there some reference paper on ...
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1answer
121 views

For a trading strategy how many trades have to occur for statistical significance [closed]

I created a strategy using a regression on a price series. I tested it with many walk-forward analyses and it has passed. I am currently live trading it with real capital (the ultimate test). My ...