# 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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7 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 ...
146 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 ...
41 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 ...
11 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 ...
17 views

### Using monthly CRSP EWRET to build equally weighted portfolios based on market equity and book to value ( SAS)?

I was wondering if it is possible to download the EWRET variable from Wharton in order to construct equally-weighted portfolios and rebalance every June? I have seen a few fancy codes for this ...
67 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)...
56 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 ...
49 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. For example, this is ...
257 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 ...
178 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 ...
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.
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 <...
61 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 ...
129 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 ...
178 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 ...
152 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 ...
50 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 ...
41 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 ...
44 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 ...
87 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 ...
119 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 ...
81 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 ...
54 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 ...
24 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?
62 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 ...
24 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 ...
46 views

273 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 ...
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 ...
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 ...
62 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 ...
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 ...
39 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 ...
41 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(...
24 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 ...
112 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 ...
103 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 ...
152 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 ...
3k 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-...
90 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 ...
157 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 ...
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 ...
96 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 ...
169 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 ...
821 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 ...
107 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 ...