# Questions tagged [finance]

The science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.

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### Is there any bias introduced by evaluating a model and decisions based on this model on the same data set?

As an example, let's say we have some financial time series such as closing prices of some stock and we would like to evaluate the ability of different models to forecast future closing prices as well ...
35 views

### Does variance depend linearly on beta?

Under the CAPM, consider an investment with stochastic cash flows. Does the variance of the return on the investment depend linearly on beta? if not, why so?
27 views

### Constrained regression with multiple sum=0 constraints

this is my first post on this website so please advice me if I can add any relevant information. I'm running into a problem of how properly set up a model by using the Sum to zero constraint in Python....
10 views

### Hierarchial clustering given a list of banking syndicates

I have a list of banking syndicates (groups of banks), and I'm trying to do some hierarchical clustering on it to gather if there is some connection between them (e.g. if lots of syndicates share the ...
64 views

### Identifying stress in financial stress index constructed using PCA using Hodrick-Prescott filter

I am reading: https://www.econstor.eu/bitstream/10419/128519/1/ewp-356.pdf The footnote on page 19 says: The trend was derived using the Hodrick-Prescott method where the smoothing parameter λ is set ...
1 vote
66 views

### How to create representative training, validation, and test sets when working with time series data?

In my application, I am working with a relatively long time series of daily market index percentage returns (many years) and am trying to model the dependence structure of the returns from a pure time ...
1 vote
10 views

### Expected Regression Coefficent in return space

Say you are running a regression on predicting the future 1 second return(new price / curr_price - 1)/ using the return of past 1 Milli second, what is the expected range of coefficient in this case? ...
1 vote
61 views

### Measuring Portfolio Volatility when Risk-Off

I'm trying to calculate the annualized volatility of a single-asset trading strategy that is either 100% long or 100% cash. Imagine a risk-free asset with a guaranteed and fixed daily return of 0.1%. ...
1 vote
10 views

### Evaluate Value at Risk (VaR) models with different VaR backtesting approaches - averaging p-values?

I estimated the Value at Risk of a time series of log returns with different approaches and models. Now I want to compare the models and choose the model that most accurately estimated the Value at ...
12 views

### Choosing one method for modeling Value at Risk (VaR) over another - determining the "best" model

I estimated the Value at Risk of a time series of log returns with different approaches and models. Now I want to compare the models and chose the model that most accurately estimated the Value at ...
31 views

### How to normalize slope of historical financial data?

Im trying to find a method to normalize the slope value for the historical net profits of many companies. But the problem arises when certain companies are clocking profits in thousands, and some in ...
19 views

### Insignificant confounder

I have a simple regression of price on growth: $price_i = \beta_0 + \beta_1growth_i+u_i$ In this simple regression, the p value for $\beta_1$ is highly significant, but I am worried that there is a ...
27 views

### How to properly add dummy variables as controls when the independent variable is a dummy variable?

I am writing a thesis where I investigate whether ESG/sustainable funds' decision to invest in fossil fuels/weapons affects fund flows. I am regressing a fund flow variable on a dummy variable x which ...
1 vote
29 views

### Comparing different methods for modeling Value at Risk (VaR) - understanding VaR backtesting results

I estimated the Value at Risk of a time series of log returns with different approaches and models. Now I want to compare the models and find the model that most accurately estimated the Value at Risk....
38 views

### Reconciling Nondeterministic and Probabilistic Decision Rules

I've been getting a bit stuck recently on how to reconcile the two seemingly-competing ideas of nondeterministic and probabilistic decision rules. As an example: Let $t=0$ denote the current time and ...
1 vote
43 views

### Should standardizing a vector of data lead to a unit length vector? [closed]

I am reading "Introduction to Econophysics" by Stanley and Mantegna and I found the following in Chapter 13. I can't understand why the 2-Norm of a vector standardized by subtracting the ...
22 views

### What are the advantages of using Functional Data Analysis (FDA) over traditional Time Series or Stochastic Process approaches?

In the case where the curves (functions) are defined on a time interval.
16 views

### How do payouts for bets change as the odds change?

Say that there's a horse race between the two horses Alice and Bob. People bet on which horse will win. The "house" is taking no money off the top, so basically it's a direct transfer where ...
1 vote
27 views

### What color financial time series are there? [closed]

There is a folklore white noise hypothesis related to (and equivalent to some forms of) the efficient market hypothesis in finance -see references below. But are there some asset pairs whose return ...
25 views

### Produce automated suggestions on beancount entries

I'm doing text-based, double-entry bookkeeping using beancount, and I'm creating a GUI application using node.js to automate some steps in the process. Some example data looks as follows: Payee #1 ...
28 views

### Error-in-Dependent-Variable in Panel Data

Given an unbalanced panel of data points $(X_{i,t})$, I calculate variances in a rolling window (labelled $Y_{i,t}$). I want to calculate the time series mean of cross-sectional averages of this ...
47 views

### I'm trying to solve for the probability of log-returns assuming a random walk model, but I'm getting different answers using simulation in R vs theory

Assume the log returns of an asset follow the normal distribution with $\mu = 0.05/253$ and $\sigma = 0.23/\sqrt{253}$, I would like to know the probability the asset's returns drop below $\ln 0.95$ ...
143 views

### How can I interpret the below GJR-GARCH model in terms of "leverage effects"?

I'm very new here and am struggling to interpret the model. Please help me in layman's terms. ...
14 views

### CAPM. Intercept not significant [duplicate]

I am calculating the CAPM model of BlackRock share price. In particular the model is: Rb=return BlackRock Rf= return risk free asset Rm = return SP500 Rb-Rf = intercept + B(Rm-Rf) In my estimation the ...
1 vote
33 views

### How can I combine multiple regression models? [closed]

I'm trying to predict some financial feature (continuous) and there are two or more good regression models. Is it possible to combine multiple regression models? If so, what kind of method is it ...
28 views

### What is the probability that price reaches expected target within a time interval?

The Forecasting Model I have developed a proprietary forecasting model (call it AMA) that forecasts an expected range in price movement of a particular security. An example of the way it works is by ... 24 views

### Yet another attempt at deciding the sign of a PCA based index [duplicate]

I am trying to build an index with and without using Principal Components Analysis. I have read that the sign of the PCA based index is arbitrary. All the PCA can do is give me a direction. I can ...
1 vote
27 views

### If returns are random variables, then how can CAPM be posed as a simple linear regression?

The Capital Asset Pricing model proposes that, $$R_i=R_f+\beta(R_m-R_f)$$ where $R_i$ is the return of the i-th asset, $R_f$ is the risk-free rate and $R_m$ is the Market returns. $\beta$ is ...
89 views

### Loss function weighting in regression when the target varies orders of magnitude between groups

I have a dataset with 200 groups, and 50-300 observations per group. The target I'm trying to predict is a strictly positive financial metric, which varies 5+ orders of magnitude between groups but is ...
41 views

### Does embargo and purging completely remove autocorrelation?

Marcos de lopez who wrote the book "Advances of ML in Finance" talked about a new cross validation technique where he removed the autocorrelation of the time series by deleting a few ...
1 vote
15 views

### Testing equality of betas of multiple assets in the Capital Asset Pricing Model

I am trying to understand how I can test whether the factor loadings (Beta) in CAPM for different stocks are statistically different between each other. I.e. I have 3 stocks with different CAPM betas. ...
34 views

### Approximation for the Volatility of an Interest Rate

I'm a pure math student teaching myself the basics of quantitative finance, and I'm having a hard time understanding some of the approximations/nonrigorous claims that are common in applied statistics....
1 vote
450 views

### Understanding the GRS test of the Capital Asset Pricing Model

I posted a similar question on Quantitative Finance Stack Exchange a while ago. It has not received any answers, thus I am reposting a version of it here in the hope of finding a larger pool of ...
1 vote
49 views

### Differences-in-Differences Parallel Trends

I want to measure whether the impact of a company's headquarter country on my dependent variable (goodwill paid) is stronger during recessions. After some researching, I found out that the differences-...
25 views

### Daily closing price predictions using LSTM

I am quite new to the theory of RNNs so please excuse me if the question is trivial. I'm trying to fit an LSTM model to predict daily closing prices of 10 stock. I'm planning to fit separate models to ...
53 views

### Clustered vs. GMM-based standard errors: which ones to use in asset pricing?

This question was posted on Quantitative Finance Stack Exchange a while ago. While it was received positively there and generated a reasonable amount of views, no answers have been posted. Thus I am ...
32 views

### How can I generate time series with strong autocorrelation?

I'm new in time series analysis. Given an observed time series, actually the history price of certain asset, I tried to resample it to generate surrogate time series for testing purpose. After ...
20 views

### Estimating Volatility in financial time series

According to Ruey S. Tsay's Analysis of Financial Time Series, the way volatility is estimated is to fit ARMA model to log-return data and then square the residuals from ARMA model. The squared ...
53 views

### Event study: difference between abnormal returns (AR) and cumulative abnormal returns (CAR)

How can I interpret an event study where, during the event window, there are days with significant abnormal returns (AR) but no significant cumulative abnormal returns (CAR)? Could it be that since ...
142 views

### Testing of CAPM

I'm so confused regarding the test of CAPM with its hypothesis. So we have these null hypothesis, right? H0: α = 0, β ≠ 0 If the estimates of intercept a is something 0.4 and t-stat is something ...
25 views

### Do residuals depend on the equation used for estimation?

I am considering a simple decomposition of share prices, in an attempt to calculate idiosyncratic price movements. Suppose we have a stock with price $S$. Then, one can think about the price as ...
22 views

### Comparing nested simple and multiple regression models

I have a question regarding the intepretation of results from two regression models, these are based on the CAPM and APT (Arbitrage Price Theory) The models are presented in the picture below: Where E(...
33 views

### Volatility Modelling of Equity , error in code

Dear StackExchange Community, I am working on the codes by https://rpubs.com/rsayed/573439 to "measure the volatility spillovers and connectedness" using Diebold-Yilmaz Methodology (https://...
37 views

### Determine the optimal action sequence for forex trading

Say I have historical data for exchange rates for six currency pairs : ‘a->b’, ‘b->c’, ‘c->a’, ‘a->e’, ‘e->f’ and ‘f->a’. c. Buying and Selling of every FX pair is possible. For ...
76 views

### What is the expected inverse stopping time for an Brownian Motion?

Let $B_t$ be standard Brownian motion and $\tau_a=\inf\{t\geq 0 : B_t \geq a\}$ be the stopping time where $B_t$ exceeds some value $a$. Is there an analytic form for \$\mathbb{E}\left[\frac{1}{\tau_a}\...
1 vote
62 views

### Can the GARCH intercept be 0?

Reading the ARCH and GARCH theory I understood that alpha_0 have to be > 0 , but when I estimate my GARCH-X(1,1) model I obtain a non significant constant, like this: Is it a problem? How can I ...
44 views

### Detection outliers in financial time series taking into account related time series

I would like seek advice on how to build an efficient approach to identify outliers in a financial series taking into account also related series. For example, let's assume the there is a very ...
17 views

### Can anyone provide me with reference to some lecture notes or an online lecture on Multiplicative Error Models?

As the title says, I am looking for some lecture notes or an online class going over Multiplicative Error Models. I have found a number of academic papers on the topic, but I am having trouble ...