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Questions tagged [finance]

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

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Value at Risk with non-zero mean (RiskMetrics etc.)

RiskMetrics assumes zero mean for the calculation of value at risk (https://www.msci.com/documents/10199/5915b101-4206-4ba0-aee2-3449d5c7e95a) In our data, the mean return is quite negative. Is there ...
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12 views

Modelling CAPM with a time series dataset in Stata

I have a time series dataset and to model CAPM, I also need a risk free rate of return. I wanted to use the daily US 10-year bond yields as the risk-free rate. My data spans over 7 years. I have ...
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13 views

question about the logit model for credit risk

i have this question in one of the past exams . Discuss which model you would choose to calculate the probability of default of corporate firms and give a rationale for including OR excluding the RE/...
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1answer
23 views

Value at Risk VaR with monthly return

The picture below shows the problem. I have tried to solve in this way: 0,001*1,88+2400*0,002 by following a formula in theory slides. But obviously there is a problem in that. Could someone help me ? ...
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44 views

Neural Network for the Famous Black-Scholes Equation (1972)

The price of an option (in finance) is given by the famous Black-Scholes equation. I would like to design a neural network to predict the price of an option. Basically the inputs are the attributes of ...
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12 views

Data structure for share capital increase

I have the following dataset for share capital increases for the 2010-2017 period: ...
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25 views

Unit root test with a dummy for an event

I'm currently working with financial time series that experience a crash towards the middle of the series. These series are returns. From the graph, these series clearly look stationary. However, due ...
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1answer
32 views

Sample from aggregate portfolio distribution versus individual asset distributions

Suppose I have three assets $x_1,x_2,x_3$ in a portfolio with weights $W=\begin{bmatrix} w_1 \\ w_2 \\ w_3 \end{bmatrix} $, expected returns $R=\begin{bmatrix} \mu_1 \\ \mu_2 \\ \mu_3 \end{bmatrix}$, ...
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30 views

Test for confounding variable S&P 500 Python

I'm looking into a possible topic for a school project currently. It involves looking at the S&P 500 in comparison to other indices globally (e.g., Nikkei, DAX, etc.). I currently have plotted 19 ...
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51 views

Unit root in time series of log return of s&p 500. What to do? [closed]

I have 9500 closing prices of s&p500. I took daily return of the prices dailyreturn and then log return of the prices logreturn=log(1+dailyreturn). Now I checked the data using augmented Dickey-...
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1answer
40 views

Lag between forecast and actual value without lagged dependent variable as features

I'm trying to predict a time series using a model-tree (Cubist) and I'm getting a strange behavior, I think. This is a stock market data but I'm not using the raw level of the stock price but change ...
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51 views

Noise in ARIMA Model In-Sample Predictions

I am working on fitting some financial data into an ARIMA model to give me a forecast of the next time period. I am using pyramid's auto_arima function to get a ...
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1answer
86 views

Algorithm to find the attributes that comprise the greatest concentration

I have a porfolio of mortgage loans where each loan has a number of attributes attr1, attr2, .., attrN. I would like to analyze the portfolio credit risk concentration (see below) using these ...
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1answer
66 views

How to minimize sharpe ratio with LSTM recurrent neural network?

I've read some articles about trading using recurrent reinforcement learning such as this one. The point where I do not fully understand is how to construct the cost/loss function. In the article, ...
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42 views

Difference-in-difference specification using autocorrelation or additional dimension

I am interested in studying the impact of a monetary policy intervention on the supply of credit from banks to firms. For the same, I am interested in using a difference-in-difference estimation ...
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13 views

First moments of GBM-like process with non-normal shocks

First consider a standard GBM process of the form, $$\frac{dS_t}{S_t} = \mu dt+ \sigma dW_t$$ but instead of the normal $W_t \sim N(0,1)$ , instead we have that $W_t \sim EMG^-(0,1,\lambda)$. Where ...
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11 views

Should drift / mean for the Correlation of two securities be removed

I am trying to feel whether I should use another version of the pearson correlation to judge the predictive capabilities of a signal. I have a trading signal that gives a prediction (of the next time-...
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10 views

Testing for difference in means for utility of wealth

Assume you have 2 different investment strategies, A and B. You simulate how A and B perform on the same $N$ time series of returns and compute the resulting utility of wealth. $N$ is large, say ...
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47 views

Machine learning techniques to evaluate hedge funds

I have a data set which consists of > 500 hedge funds, their historical monthly returns, and their benchmark (index) monthly returns. The number of data points (# of monthly returns) differs from a ...
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1answer
34 views

Measuring correlation between random variables when they are not normally distributed?

I want to perform some analysis on portfolio that consists of stocks. In particular, I want to know the relationship between the stocks during the downmarket. The problem complicating this analysis ...
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1answer
57 views

Is Reinforcement Learning suitable for optimal control problems in which actions influence rewards but not states?

In particular, rewards $r = f(s, a, s')$, but states are independent of actions $s' = g(s)$. A example could be asset trading that actions (long, short, hold) of a small trader won't affect market ...
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53 views

Expectation of Maximum Value

I'm trying to understand the basic statistics involved in trading. Suppose I'm trying to decide whether to buy a stock whose current price is $V_0$. Suppose I have some fancy statistical model from ...
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58 views

ARMA-GARCH model with t-distributed errors

I've estimated an ARMA(1,2)-GARCH(1,1) model fitted on financial data. It is very satisfactory in modeling the autocorrelation and the volatility in my data, however, the qq-plot empirical quantiles ...
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24 views

Cointegration vs high cross-correlation in pairs trading

My econometrics professor once said that “trading two cointegrated series is a profoundly different thing than trading two highly correlated series”. What was he referring to and what are the ...
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53 views

Machine Learning on Extremely Low Signal Data

I have terabytes of data with an extremely low signal to noise ratio, with the following characteristics: The relationship between the features and the response variable can change over time I'm ...
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47 views

Parameters in Autoregressive representation of an ARCH model

Suppose we have a $0$ mean time serie representing stock index returns about a title, $r$. I also know it follows an $ARCH(p)$ model with parameters $\omega$ and $\alpha$, specified in the following ...
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0answers
21 views

What are good ways to visualize budget/financial controlling data?

What are useful visualizations of budget/forecast vs actual spending data, i.e. data consisting of hierarchically structured sums compared at various (2-4) points in time? The aim would be to make ...
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0answers
17 views

PCA factor loading implementation [closed]

Say I get the following PCA results: Pc1 pc2 A 3.5 3.5 B 3.7 3.6 C.2.5 4.5 I would like to know what is x and y such that xA + yC = B. How should I ...
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1answer
70 views

Impact of window size on estimated volatility using SMA or EWMA

When calculating volatility (either using an SMA or EWMA approach), what impact does the window size have on the volatility estimate?
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33 views

Linear regression in R: testing statistical significance with t-tests

I am trying to test the statistical significance of the alphas in my trading strategy. However, I do not understand the difference between the alphas generated in R. To test the statistical ...
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0answers
41 views

Financial time series, GARCH (1,1) parameters estimation with QMLE, Generalized error distribution (GED)

Good day all, I am using a GARCH (1,1) model for financial time series. More precisely, 04 jan 2010 to 08 dec 2015 of EURUSD daily close log return data. The data distribution is clearly not normal ...
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0answers
32 views

Constrained optimization - quantitative finance

I am trying to perform constrained opmitization for portfolio performance attribution analysis. Specifically, I am trying to determine the impact of sectors performance on the S&P 500 index. Min ...
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29 views

Computing expected loss

I have three options like $A_{1}\leq A_{2}\leq A_{3}$. If I choose the higher value $A_{3}$ , I have more risk to loose. Let me make it clear , if I choose first the expected loss will be 1 , for the ...
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0answers
36 views

Why financial time series have perfect multicollinearity?

I have daily financial time series of stock returns (35 stocks) which I took the natural logarithm and subtracted the risk-free rate. However, I get the issue non-invertibility of the covariance ...
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23 views

Estimating EVT for non-i.i.d. data

I have a pnl time series (length more than 10 years) of a large diversified financial portfolio. on which i am trying to estimate VaR based on the method described in the paper : "Estimation of Tail-...
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3answers
33 views

Trying to run a regression on three variables that impact equity returns

I have three variables a,b and c, which impact equity returns, y. a is based on financial statements, so it is a quarterly figure. b and c are calculated daily, and so are daily (only on trading ...
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2answers
81 views

Nonlinear regressor in GLM link function

Try to reproduce Robert E. McCulloch and Ruey S. Tsay’s paper Nonlinearity in High-Frequency Financial Data and Hierarchical Models with local market data. the paper uses GLM to model high-frequency ...
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0answers
16 views

Confusion over expectation maximisation algorithm

first of all, apologies if this is the wrong place for this. I've been reading around my actuarial studies, and came across the expectation maximisation algorithm. I first read this article, which ...
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0answers
16 views

Can the dependent samples t test be used for this problem?

Short story: I have 2 sets of data: Set 1: Daily data of stock market returns (eg. [1%, 1.2%, -2%]) Set 2: Those same stock market returns, multiplied by a number (eg. [2%, 0.6%, -1%] which equals ...
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0answers
91 views

EWMA using Monte-Carlo simulation

Im trying to forecast volatility using an EWMA model in python. Where i have return(t-1) and variance(t-1). n is number of days. for every Monte-carlo simulation N: t=1: Forecast the variance using: ...
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1answer
28 views

Need handy formula for $\text{Cov}[\max(V_1-K_1,0), \max(V_2-K_2, 0)]$

In a recent post, I asked for help deriving a computable formula for $\text{Var}[\max(V-K,0)]$ based on the approach on p. 262 of ths book. $V$ is a lognormally distributed random variable and $K$ is ...
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0answers
20 views

What machine learning methods for estimating return, risk contributions of sectors to market?

I want to know analytical machine learning methods (the more innovative, the better!) to calculate contributions of sectors (ex. financials, consumer staples, industirals indices) to the market (ex. s&...
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0answers
5 views

What are some analytical methods to find contributions of sectors/industries to the market index?

I want to know analytical methods (the more innovative, the better!) to calculate contributions of sectors (ex. financials, consumer staples, industirals indices) to the market (ex. s&p index). ...
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2answers
108 views

Need handy formula for $Var[\max(V, K)]$

In Appendix 12A, p. 262 of this book, the author Hull derives a handy, tractable formula for the expression $E[\max(V-K, 0)]$, where $V$ is a lognormally distributed random variable and $K$ is a ...
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0answers
26 views

Is this short rate really constant?

Suppose that a financial instrument has a constant short-term rate $r$ and its price $S$ is driven by the equation $$S_t = \mu_t S_t \, {\rm d}t,$$ where $(\mu_t$) is a process adapted to the ...
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2answers
81 views

Why does the maximum probability of profiting occur when std. deviations of two different stock prices are equal?

I am working through the "Math for Quantitative Finance" course on brilliant.org. The following question was given as an example: An investor wishes to invest $700. There are two independent ...
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21 views

Evaluate the significance of the relationship among VIX and S&P 500

I have the weekly time series of returns for both VIX and S&P 500. For the VIX I'm looking at 1 week return period (e.g. this is a 5 day return series rolling weekly) For the S&P 500, ...
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0answers
63 views

Percentage of total variation explained in a VAR model

I was studying Campbell, Chen, Viceira (2003) https://dash.harvard.edu/bitstream/handle/1/3163263/campbellnber_assetallocation.pdf?sequence=2 I cannot really understand how they decompose the ...
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0answers
50 views

Predictive regression on Fama/French

I have to predict (monthly) returns on Stock Indices (S&P 500) with the FF-Model (3 and 5 Factors). Therefore I shall use a predictive regression and an in-sample analysis. I started off with a (...
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0answers
23 views

Deciding best mining option (return over time) for crypto-currency [closed]

I have series of reward options based on different pools and cashout restrictions that they have. \$1 in 1 day \$10 in 5 days \$20 in 10 days \$360 in 360 days \$3650 in 360 days So participating in ...