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32 votes
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Why aren't econometric models used more in Quant Finance?

It's an interesting question. I particularly agree with the $\mathbb{Q}-\mathbb{P}$ dichotomy mentioned by many. I would add to the other answers that, come to think of it, the Black-Scholes ...
Quantuple's user avatar
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17 votes

Why aren't econometric models used more in Quant Finance?

I think you need to differentiate between Q-quants vs P-quants. The former might not use Econometrics, but P-quants use them a lot.
Kiwiakos's user avatar
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13 votes

Choosing the right statistical test for Mutual Fund Performance Evaluation

Define excess return $r^x_{it} = r_{it} - r^f_{t}$ as the return $i$ minus the risk free rate, and $f_{jt}$ similarly denotes the excess return of factor $j$ at time $t$. Let's say we have some factor ...
Matthew Gunn's user avatar
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12 votes

Why aren't econometric models used more in Quant Finance?

Traditional econometric (time series) models are of little or no value in forecasting market prices for purposes of "making money", i.e, generating excess return over a benchmark in an asset ...
RRL's user avatar
  • 3,700
12 votes

Fama Mac-Beth (1973) vs Fixed effect

A more apples to apples comparison would be between (i) Fama-Macbeth procedure and (2) clustering standard-errors by date. Adding fixed-effects is somewhat different. Problem: cross-sectional ...
Matthew Gunn's user avatar
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10 votes
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What is the stambaugh bias? Why is it important for predictability regressions?

The bias comes from the paper Stambaugh (1999) and has nothing to do with small sample bias. It has to do with point (1) below. The argument goes as follows: Typical lagged explanatory variables ...
phdstudent's user avatar
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9 votes
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Suppose that we are wrong about the relevant class of distributions for financial economics and econometrics. Now what?

I will be glad to help, but let me first advise you away from working on this topic until you have an academic position. This topic has been poison for me, but I am slogging on anyways. Before you ...
Dave Harris's user avatar
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8 votes

Why aren't econometric models used more in Quant Finance?

Having thought about this I think the following reason is also important and wasn't mentioned so far: When you look at the inner working of this whole class of econometric models it all boils down to ...
vonjd's user avatar
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8 votes

Why aren't econometric models used more in Quant Finance?

My answer is very much in the spirit of Kiwiakos' answer. E.g. in this paper (where I am one of the coauthors) we use VMA (vector moving average) models (in the multivariate case) and AR models in ...
Richi Wa's user avatar
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7 votes

Predict the behavior of a time series (P&L trading desk)

Without seeing your trading desk's P&L it's impossible to say whether it is predictable or not. But here are a few thoughts - There's no reason to think that it isn't predictable. In general, ...
Chris Taylor's user avatar
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7 votes
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Interpreting the coefficients of Fama-MacBeth regression

No, you cannot interpret the average return for the factor as the risk premium. The second stage regression is equivalent to building a set of portfolios that have no net investment, a unit exposure ...
Tim Wilding's user avatar
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5 votes

Is a linear combination of GARCH processes also a GARCH process?

No, a sum of two GARCH processes is generally not a GARCH process. (I am not even sure whether there exists a nontrivial special case where the opposite holds.) By GARCH I mean the classic ...
Richard Hardy's user avatar
4 votes
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Which python packages would you recommend for time series analysis?

The gold standard for time series analysis in Python is pandas. Pandas was originally developed at AQR to support their in-house research and has since been open-sourced. It has very high-performance ...
Helin's user avatar
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4 votes

Which quantitative tools are actually used for hedging energy price and volume risk?

Just came across this thread...not sure if you already have your answer, but thought I'd give you a shout. In the energy business, we employ a range of models. You'll find the most sophisticated ...
Chet's user avatar
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4 votes
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Quantitative features of asset price bubbles beginning

A nice paper by Sornette, about Dragon Kings here
DomingoBrown's user avatar
4 votes
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Question on the use of a limit in a proof

It makes no sense to write $C^h \to e^{\delta C}$ as $T \to \infty$ when $C = I_K +\Lambda/T$ since $e^{\delta C}$ on the right-hand side depends on $T$. What can be confirmed is $(C^h)_{k,k} \to e^{\...
RRL's user avatar
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3 votes

How to compute a Fama-Macbeth R-Squared (R2)?

There's nothing different here. To compute $R^2$, you need the actual values $y_i$ and the fitted (i.e. model predicted) values $\hat{y}_i$. Think of the Fama-Macbeth procedure as just another way to ...
Matthew Gunn's user avatar
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3 votes
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Disadvantages of large panel

In general, more data is better than less data. On the topic of your specific scenario, you want to cluster by date or use some other procedure to produce consistent standard errors in the presence ...
Matthew Gunn's user avatar
  • 6,974
3 votes

How to find relationships between financial data?

I'm not sure what you mean by formal but if you have intuition into why gdp or your education metric should be related to the growth of stocks, then by all means, build a model that tries to find the ...
piRSquared's user avatar
3 votes
Accepted

Standard Stochastic Volatility Models VS Moving Average Stochastic Volatility Model

Finally I have found the answer on my own. The problem was related to the trasformation of the dataset. The original code used: ${{y}_{t}}=400*(\log ({{P}_{t}})-\log ({{P}_{t-1}}))$ as dataset. ...
user22108's user avatar
3 votes
Accepted

Fama and French (market premium) factor

Update I downloaded the return series for WFIVX (a Wilshire 5000 index fund) and I calculate a correlation coefficient of .9991 with the Fama-French market return series from Ken French's website (...
Matthew Gunn's user avatar
  • 6,974
3 votes

Quantitative features of asset price bubbles beginning

There is a mathematical literature proposing bubbles may be modelled as spot processes which follow a strict local martingale dynamics. See Protter https://link.springer.com/chapter/10.1007/978-3-319-...
q.t.f.'s user avatar
  • 1,885
3 votes

Criticise GARCH relative to Realized Volatility

Volatility is an unobservable continuous variable defined over a period of time (formally defined as a stochastic process over an interval) whereas Garch models deal with discrete time observations to ...
Malick's user avatar
  • 2,582
3 votes
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Calculating the pricing error in Fama-Macbeth Regression for Fama/French 5 Factor model

John Cochrane (in Asset Pricing) p. 244: Sampling error is, after all, about how a statistic would vary from one sample to the next if we repeated the observations. Clarification on linear ...
skoestlmeier's user avatar
  • 2,916
3 votes

What's the difference between Statistics and Econometrics?

Econometrics means measurement in economics as per Chris Brook, so in the context of this question econometrics can be viewed as application of statistics to economic data/phenomena. Vast majority of ...
Magic is in the chain's user avatar
3 votes

Which references would be useful as an introduction to econometrics as it pertains to CONTINUOUS TIME models?

This is seen as a bit of a niche field, which is likely why there are not so many books and these issues are not covered in standard econometrics texts. Options pricing models are usually fitted to ...
fes's user avatar
  • 1,727
2 votes

What's the meaning of the intercept in asset pricing model?

The traditional cross-sectional asset pricing focuses on the factors implied by the theory of stochastic discounting factor. Specifically, the existence of stochastic discounting factor leads to $1=\...
Yang Bai's user avatar
2 votes

relation between asset's and equity volatilities - merton model

The derivation of $$ \sigma_E E_0 = N(d_1) \sigma_V V_0 $$ is actually in Merton (1974). Equation 3.b is what you are looking for. The only difference is the notation. You can see F as E, and ...
Jinhua Wang's user avatar
2 votes

How to fit exogenous + GARCH Model In Python?

It is an old thread. Just pointing out that capability is available in ARCH package now for the benefit of future readers. https://pypi.org/project/arch/ Volatility models ARCH GARCH TARCH EGARCH EWMA/...
P RAY's user avatar
  • 121
2 votes

Fama and French (market premium) factor

If you look closely to Frama French 1992 you will see that Fama-French exclude financials from their sample. They do not specify whether these are excluded from the market factor or not. That might be ...
phdstudent's user avatar
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