We’re rewarding the question askers & reputations are being recalculated! Read more.

Questions tagged [statistical-finance]

Statistical finance, which is also called 'econophysics' is the application of statistical tools to the study of financial markets data.

Filter by
Sorted by
Tagged with
18
votes
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 ...
17
votes
2answers
393 views

How reliable is Benford's Law in forecasting crises?

I was recently reading an article about how financial accounting has increasingly deviated from the ratios expected by Benford's Law. (Benford's Law and Decreasing Reliability). The author discusses ...
15
votes
1answer
2k views

statistical arbitrage vs factor trading

I've recently read Avellaneda & Lee which seems to be widely recommended as an introduction to Statistical Arbitrage methods in trading. For those who aren't familiar with the paper, the method in ...
9
votes
2answers
2k views

What is the total correlation between assets in a portfolio?

Suppose I have portfolio with 10 assets, each one of them with a weight of 10% from the total portfolio (equally weighted). It's well known how to measure from historical prices->returns a variance-...
9
votes
5answers
425 views

Can classical economics explain *any* of the so-called stylized facts of finance?

I am doing some reading on the (historical) emergence of the Black-Scholes implied volatility smile for index options (yes - post 87), and I stumbled across an economic paper attempting to explain the ...
9
votes
2answers
3k views

What are the econometric assumptions in the Fama-Macbeth procedure (1973)?

Fama-Macbeth (1973) introduce a two stage cross-sectional regression method (http://en.wikipedia.org/wiki/Fama%E2%80%93MacBeth_regression). 1) If I was to regress stock prices (or returns) on a ...
7
votes
1answer
662 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 ...
7
votes
0answers
257 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?
5
votes
0answers
194 views

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 ...
4
votes
2answers
917 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 ...
4
votes
3answers
657 views

Measuring historical earnings surprises, their frequency and severity

This is my first post to Quantitative Finance, so I hope my question is formatted the right way. I am starting to research the effects of earnings surprises on certain equity indices. Is there a ...
3
votes
2answers
806 views

Basic question on Portfolio Theory

I was revising my stuff about portfolio theory and I noticed that every single time, expected return and corresponding variance or covariance are given! (not calculating ourselves). So I'm just ...
3
votes
2answers
226 views

Value at Risk - What if an account has never suffered from a negative return

I want to implement an algorithm that calculates an account's 95% value at risk on a monthly return base. The case I want to describe in this question is rather academic and will probably never happen ...
3
votes
2answers
127 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 ...
3
votes
1answer
231 views

Compare events effect on stock prices from different time periods

I’m going to test for the effect corporate credit rating announcements have on stock prices through different economic climates (good times vs. bad times). I want to research whether or not the stock ...
3
votes
1answer
50 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 ...
3
votes
0answers
91 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 ...
3
votes
0answers
80 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
2answers
112 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
votes
2answers
939 views

What are the advantages of financial modelling in R? [closed]

Recently I've found out that quantitative department in my company uses mostly R software for modeling in general. What is the advantage of modeling financial data in R instead of Excel, or some ...
2
votes
4answers
14k 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 ...
2
votes
3answers
125 views

Does longer time horizon necessarily imply reduced risk?

Is there a mathematical/statistical basis for the commonly-held belief that the longer certain assets (particularly equities) are held, the less risk the investor is exposed to? Alternatively, is ...
2
votes
1answer
311 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 ...
2
votes
2answers
823 views

Variable Drift Ornstein–Uhlenbeck Process

The Ornstein–Uhlenbeck process is defined as the stochastic process that solves the following SDE: $dx_t = \theta (\mu-x_t)\,dt + \sigma\, dW_t$ where $\theta>0$, $\mu$ and $\sigma>0$ are ...
2
votes
2answers
147 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 ...
2
votes
2answers
202 views

Applying my Machine Learning class (possibly to small markets) [closed]

I've finished a university course in statistical machine learning that covered topics such as regression, classification, neural networks, SVM, PCA etc. The class was quite tough and rigorous (we had ...
2
votes
1answer
179 views

Where can I find ideas for strategies? [closed]

Every book I read refers me to many other books, there is practically no way I can read all this text in my life time. Once and for all, where is the best place to fish for ideas?
2
votes
3answers
3k views

Detrending price data for analysis of signal returns

I'm looking to conduct hypothesis tests on some of my trading signals to see if the signal returns are statistically significant enough to falsify my null hypothesis that the signal has no predictive ...
2
votes
1answer
55 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 ...
2
votes
1answer
118 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 ...
2
votes
1answer
90 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 ...
2
votes
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 ...
2
votes
1answer
187 views

How to construct a cointegrating vector using more than 2 price series in R?

I use now this code from hier Why does the following data fail my cointegration test? with slightly modification of possibility to load something directly from Dropbox file storage . ...
2
votes
1answer
849 views

Running a simple alpha estimation test for statistical significance of a signal

I'm looking for some direction on testing whether a simple entry signal has statistical significance. Let's say this is my simple entry signal: Buy when some indicator has a positive slope and is ...
2
votes
0answers
35 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 ...
2
votes
0answers
22 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
0answers
241 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 ...
2
votes
0answers
102 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*...
2
votes
1answer
27 views

why do we use greater than or equal to for submartingale?

I've just learned about martingale, but i could not find any reason that we use greater than or equal to sign when we define submartingale. In stead of using greater than or equal to symbol, can't we ...
2
votes
1answer
154 views

Regarding “Two Singular Diffusion Problems” by William Feller

I'm currently reading the research paper, Two Singular Diffusion Problems, by William Feller (1950). However, I don't understand how Feller derived the solution $(3.5)$ given equation $(3.4)$ in his ...
2
votes
0answers
88 views

I want to optimize an equity portfolio for the four central moments can anyone help me with the 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 ...
2
votes
0answers
66 views

Is there a different test to check stationarity? [duplicate]

I am using the KPSS test to check stationarity of a financial time series. I would like to know if there is another test to confirm the stationarity. Any advice?
1
vote
1answer
32 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
vote
1answer
1k 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-...
1
vote
2answers
290 views

Central limit theorem and normality assumption of asset return distribution

Can central theorem justify normality assumption of assets return distribution? And if it can why the empirical evidence show this assumption, which many finance models are based on, is a far cry from ...
1
vote
1answer
71 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 ...
1
vote
1answer
107 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
vote
3answers
2k views

How to convert weekly data to monthly in r (or in Julia)

I have weekly series on financial risk index data as follows: DATE NFCIRISK 1/8/1971 0.58 1/15/1971 0.61 ......through 10/6/2017 -0.88 10/13/2017 -0.89 10/20/2017 -0.89 ...
1
vote
1answer
89 views

How can I compare two mutual funds' performance with a sparse set of data?

I want to compare the performance of two mutual funds. The only data I have is annual returns for the past 7 years. So I have 7 observations for Fund 1 and 7 observations for Fund 2. In addition, I ...
1
vote
1answer
43 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} ...