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Applied Financial Econometrics Theory Method and Applications 1St Edition Maiti Full Chapter
Applied Financial Econometrics Theory Method and Applications 1St Edition Maiti Full Chapter
Applied Financial Econometrics Theory Method and Applications 1St Edition Maiti Full Chapter
Moinak Maiti
Applied Financial Econometrics
Moinak Maiti
Applied Financial
Econometrics
Theory, Method and Applications
Moinak Maiti
Department of Finance
National Research University
Higher School of Economics
St. Petersburg, Russia
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
Nature Singapore Pte Ltd. 2021
This work is subject to copyright. All rights are solely and exclusively licensed by the
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The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore
189721, Singapore
To my parents: Mr. Lakshmi Kanta Maiti and Mrs. Sandhya Maiti.
—Moinak Maiti
Preface
vii
viii PREFACE
Thanks for all the helps you given to me during the lecture. And all the
lecture materials we used in the class are associated with most current
researches and study, that are very useful and practical. I personally
benefited from this.
I would like to continue my studies for both the subjects because I
learned a lot, it would be great. In any case, I want to say thank to you
for your passion and teaching.
I would want to take this opportunity to express my heartfelt apprecia-
tion for your contribution to the publication of my term paper and other
assistance you have given me. It was a great beginning for my research
career.
Thank you professor for the course! It was very useful and practical
oriented.
Moinak Maiti
ix
About This Book
1. Introduction
2. Random Walk Hypothesis
3. Geometric Brownian Motion
4. Efficient Frontier & Portfolio Optimization
5. Introduction to Asset Pricing Factor Models
6. Risk Analysis
7. Introduction to Fat Tails
8. Threshold Autoregression
9. Introduction to Wavelets
xi
xii ABOUT THIS BOOK
Moinak Maiti
Praise For Applied Financial
Econometrics
xiii
xiv PRAISE FOR APPLIED FINANCIAL ECONOMETRICS
am surprising with the update of this book as it has included current latest
development in financial econometrics such as fat tails, threshold regres-
sion, and Wavelets analysis. I confidently recommend “Applied financial
econometrics” and I trust that it would provide huge benefits for finance
students but also promoting their future development.”
—Dr. Canh Phuc Nguyen, Senior Lecturer, University of Economics Ho
Chi Minh City
“This book is a complete balance between the theory and the practice. It
is a comprehensive book with excellent features.”
—Dr. Saakshi, Assistant Professor, Indian Institute of Management
Ranchi
“Dr. Maiti has written a must-read primer for anyone considering financial
econometrics… This book has several real world examples that take us
towards the data sciences ... such as examples on forecasting, non-linear
data series, predictive modelling etc…”
—Dr. Amrit Mukherjee, Postdoctoral Fellow, Zhejiang University
“I have had the pleasure of knowing Moinak since his student days when
he was an offsite intern for Bloomberg LP at Pondicherry University. He
consistently impressed me with his rigor and tenacity. He brings the same
spirit to the title “Applied Financial Econometrics”. His work considers
existing econometric theory and aspires to juxtapose it against emerging
research and practice.”
—Joel Pannikot, Head, India at CMT Association; Former Head of
Asia-Pacific Strategy-Education, Bloomberg LP
“This book has a lucid representation and relevant content for the 21st
century financial econometrician. Highly recommended to all students,
academicians and working professionals in this area as the book provides
both theoretical as well as pragmatist insights.”
—Dr. Abhijeet Lele, Assistant Professor, Symbiosis Institute of Business
Management Pune
“An indefatigable effort has been taken by the author to provide prac-
tical knowledge on trending topics of finance. This book going to make
a difference.”
—Srividya Mortha, Data Management Consultant, Wells Fargo
xviii PRAISE FOR APPLIED FINANCIAL ECONOMETRICS
1 Introduction 1
2 Random Walk Hypothesis 47
3 Geometric Brownian Motion 67
4 Efficient Frontier and Portfolio Optimization 89
5 Introduction to Asset Pricing Factor Models 113
6 Risk Analysis 153
7 Introduction to Fat Tails 203
8 Threshold Autoregression 223
9 Introduction to Wavelets 255
Index 281
xix
About the Author
xxi
Abbreviations
xxiii
xxiv ABBREVIATIONS
xxv
xxvi LIST OF FIGURES
Fig. 2.3 Price movements follow random walk model with random
drift (holding period return) 54
Fig. 2.4 Variance ratio test window 56
Fig. 2.5 Test for random walk assuming no heteroskedasticity 57
Fig. 2.6 Test for Exponential Random walk assuming
no heteroskedasticity 58
Fig. 2.7 Test for Martingale 58
Fig. 3.1 Brownian Motion path plot 70
Fig. 3.2 Geometric Brownian Motion paths plots with 20
stimulations 71
Fig. 3.3 Geometric Brownian Motion paths plots with 40 and 400
stimulations 72
Fig. 3.4 A, B: American call option price estimates using Binomial
Option Pricing 74
Fig. 3.5 A, B: American put option price estimates using Binomial
Option Pricing 75
Fig. 3.6 A, B: Plain Vanilla call option price estimates using
Monte Carlo Simulation 78
Fig. 3.7 A, B: Asian Arithmetic put option price estimates using
Monte Carlo Simulation 80
Fig. 4.1 Portfolio diversification 91
Fig. 4.2 Mean variance efficient frontier 96
Fig. 4.3 Multifactor Mean Variance (MMV) efficient frontier 97
Fig. 4.4 Capital market line and mean variance efficient frontier 99
Fig. 4.5 Security market line 100
Fig. 4.6 Mean Variance Efficient Frontier and 5000 portfolios plot 102
Fig. 4.7 Mean Variance Frontier 104
Fig. 5.1 Graphical representation of the linear asset pricing model 120
Fig. 5.2 Graphical representation of the implied cross-sectional
relationship 121
Fig. 5.3 Scenario 1 scatter plots of the data 126
Fig. 5.4 Scenario 2 scatter plots of the data 126
Fig. 5.5 Regression Equation Estimation window 129
Fig. 5.6 CAPM estimates for Portfolio 1 and Portfolio 25 130
Fig. 5.7 Fama–French three factor model estimates for Portfolio 1
and Portfolio 25 131
Fig. 5.8 VIF estimates of Fama–French three factor model
for Portfolio 25 132
Fig. 5.9 GRS test estimates for CAPM and Fama–French three
factor model 133
Fig. 5.10 Panel Regression Equation Estimation window 134
Fig. 5.11 Constant coefficients model estimates 135
LIST OF FIGURES xxvii
xxix
CHAPTER 1
Introduction
1.1 Background
The term “econometrics” was emphasized by Ragnar Frisch in the inau-
gural issue of the Journal of the Econometric Society (Econometrica)
editorial note1 published in the year 1933. Even though Pawel Ciompa
have used the term “Oekonometrie” (Econometrics in German) in the
year 1910, almost two decades beforehand Frisch. Modern economists
favour Frisch version of econometrics that “aims at a unification of
the theoretical quantitative and the empirical-quantitative approach to
1 Frisch, R. (1933). Editor’s note. Econometrica, 1(1), 1–4. Retrieved March 20, 2021,
from http://www.jstor.org/stable/1912224.
5 http://sofie.stern.nyu.edu/.
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no related content on Scribd:
NOTES.
[1] Thomas Hutchinson, the historian of Massachusetts, attributed
this document to Francis Higginson, but Alexander Young and
Robert C. Winthrop have shown that another draft of these
“Considerations,” in the handwriting of Forth Winthrop, and now
preserved in the Winthrop Papers, was probably inspired by John
Winthrop. Another copy in the English State Paper Office is
endorsed “White of Dorchester his instructions for the plantation
of New England.”
[2] Quote, i. e. quost, an obsolete spelling of coast.
[3] The manuscript now in the library of the Massachusetts
Historical Society, ends at this point, the following pages having
been lost since it was in the possession of Hutchinson. The
remainder of the journal of the voyage is reprinted from
Hutchinson’s “Collection of Original Papers relative to the History
of the Colony of Massachusetts Bay,” Boston, 1769.
[4] Gloucester harbor.
[5] These were the settlers who came with Maverick.
[6] The emigrants from Boston, England.
[7] The “Four Sisters” and the “Mayflower.”
[8] Increase Norwell, afterward Secretary of the Colony.
[A] Records of the Governor and Company of the Massachusetts
Bay in New England.—Boston, 1853.
INDEX
INDEX
Aberden, 114.
Accomack, 113.
Accomintus, 113.
Aggawom, 113.
Air of New England, 29, 98.
Ancocisco, 113.
Ancociscos Mount, 113.
Anmoughcawgen, 113.
Ash trees, 26, 95.
Assurance (ship), 62.
Bahanna, 113.
Barley, 109.
Barties Isles, 114.
Barwick, 113.
Bass, 27, 97.
Bastable, 113.
Beans, 110.
Bears, 26, 95.
Beavers, 26, 95, 119.
Beech trees, 26, 95.
Beecher, Mr., 63, 119.
Berries, 25, 94.
Birch trees, 26, 95.
Birds, 31, 100.
Biscay ship, 65.
Black, Goodman, 76.
Boats, Fishing, 28, 97.
Borley, Capt., 64.
Boston, 113.
Boston (Eng.), 125.
Bows and arrows, 35, 105.
Brass, 35, 105.
Bricks, 23, 91.
Bright, Francis, 53, 54.
Bristow Bay, 113.
Brookelime, 25, 94.
Browne, Mr., 65.
Butter, 111.
Cambridge, 113.
Candles, 32, 102.
Cannon, 37, 60, 108.
Cape Ann, 26, 77, 78, 79, 95, 113.
Cape Cod, 113.
Cape James, 113.
Cape Tragabig sanda, 113.
Carrots, 25, 93.
Carvel, 25, 94.
Cattle, 23, 34, 60, 92, 104, 109, 118.
Cedar trees, 26, 95.
Charles I, 6.
Charles River, 22, 90, 113.
Charlestown, 37, 108.
Chawum, 113.
Cherries, 26, 94.
Cherton, 37, 108.
Chestnuts, 25, 94.
Chevit hills, 113.
Christopher Islands, 65.
Churches of Europe, 41.
Claybrook Parish (Eng.), 6.
Cloth, 25, 94.
Clothing for New England, 30, 100, 111.
Codfish, 27, 96.
Cordage, 25, 94.
Corn, 23, 35, 36, 92, 107, 109, 118, 120.
Cornwall (Eng.), 64.
Cowcastle (Eng.), 62.
Cowes (Eng.), 63.
Crabs, 28, 97.
Cucumbers, 25, 94.
Currants, 25, 94.
Cush, 28, 97.
Cypress trees, 26, 95.
Falmouth, 113.
Fast kept, 67, 71.
Filberts, 25, 94.
Files, 23, 91.
Fir trees, 26, 95.
Fires in New England, 32, 102.
Fish, 27, 96, 121.
Fishing nets, 28, 97.
Force, Peter, 8.
Four Sisters (ship), 60, 125.
Foxes, 26, 95.
Iceberg, 72.
Indians, purchase corn, 24, 93;
dyes used by, 26, 95;
lights used by, 32, 102;
killed by a rattlesnake, 33, 104;
Saggamores of, 34, 104;
number of, 34, 105;
destroyed by the plague, 34, 47, 105;
unable to use all the land, 34, 105;
have no settled places, 34, 105;
personal appearance, 35, 105;
clothing, 35, 105;
weapons, 35, 105;
utensils, 35, 106;
houses, 35, 106;
approve coming of Englishmen, 35, 106;
religion, 36, 106;
language, 36, 107;
title to land, 46;
place names, 113.
Ipswich, 113.
Isle of Wight, 62.
Kenebecka, 113.
Sagadahock, 113.
Sagoquas, 113.
St. Johns towne, 114.
Salem, Landing at, 6;
name, 22, 37, 90, 107, 113;
harbor, 27, 96;
wells, 29, 98;
houses, 36, 37, 107, 108;
number of settlers, 36, 107;
harbor, 79.
Salmon, 27, 97.
Salt, 28, 98.
Saltpeter, 26, 95.
Sandwich, 113.
Sassafras, 26, 95.
Sassanows Mount, 113.
Schools of Europe, 41.
Seasickness, 62, 64.
Segocket, 114.
Sheep, 118.
Ships, 60.
Shuter’s hill, 113.
Sickness, 29, 62, 64, 99.
Skate, 28, 97.
Skelton, Rev. Samuel, 6, 53, 54.
Smallpox, 65, 66, 70, 75.
Smith, Rev., 67.
Smith, Capt. John, 114.
Smith’s Isles, 113.
Snake weed, 33, 104.
Snakes, 33, 103.
Snowdon hill, 113.
Soap ashes, 26, 95.
Soil of New England, 22, 90.
Soldiers, 36, 107.
Sorrel, 25, 94.
Southampton, 113.
Sowocatuck, 113.
Sparke, Michael, 17, 87.
Spices, 112.
Spruce trees, 26, 95.
Squirrels, 26, 95.
Stone, Building, 23, 95.
Storm at sea, 69.
Strawberries, 25, 31, 78, 94, 101.
Sturgeon, 28, 97.
Sumach, 26, 95.
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