Questions tagged [finance]

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

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1answer
34 views

Backtrack Values from Probability

I have a question on Digital options pricing : $$ \text{Payoff} = E[I(X(T) - K)] $$ Where the indicator function takes one if $X(T) > K $ and zero otherwise. Solving the expected value we can ...
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0answers
19 views

How to measure the Kumo cloud thickness?

How to measure the ichimoku cloud thickness? Hi. The ichimoku kinko hyo is an indicator used in financial analysis. The kumo cloud can be used to describe volatility, based on it's thickness. How do ...
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2answers
461 views

Credit Risk and Concentration

I am working with a UK credit-union and we are looking to build a model to assess our credit risk and changes to this over time. We have a number of loans to borrowers who each have a credit rating (...
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58 views

Backtesting GARCH model in R

I used garch to predict the volatility of shopify(SHOP.TO) . I used ugarchroll to backtest my GARCH model but my mean absolute percentage error was incredibly high: ...
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22 views

How to deal with dependent variable that has different ranges for different groups?

I have loan-level data on peer-to-peer (p2p) loans. I am studying how the number of bank branches in the borrower's county affect his willingness to pay for p2p loans. My LHS variable is the borrower'...
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13 views

regression method to predict differences between A and B given P(A>B) as prior probabilities

First off I apologize if this has been asked before, I tried searching for came up empty handed. Please forgive me if this is duplicated. I have 2 streams of data A and B which are pricing data, each ...
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39 views

One model or 178 models?

I am doing a school project, where I am modeling next quarter's stock price using the information about the stock in the current quarter. The main goal is to see if we can find any statistically ...
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1answer
198 views

Detecting leading stocks using lag correlation

I am working on a project to find leading stocks in a stock market by using lag correlation. Say I want to compare 2 stocks, X and Y, and I have the time series of stock prices. Assume that the time ...
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0answers
12 views

Python coding question [closed]

I have a question regarding how to code the logic below in python: I have one reference table containing information what should be inside each different bucket, 1 would indicate it should contain ...
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1answer
641 views

What is the dummy variable in the Henriksson-Merton model for market timing ability?

I am a little confused about calculating the dummy variable on the Henriksson-Merton model for market timing ability. Some researches used 1 if the excess return for market is negative but other ...
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31 views

ARIMA(0, 1, 0) or ARIMA(0, 0, 0) for Stock log-Returns Forecast

I'm trying to forecast the log-returns of Amazon's stocks using the ARIMA model, so I went through the traditional procedure of examining the autocorrelation plot and the partial autocorrelation plot ...
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1answer
1k views

Mean and SD of daily log returns

Assume a given stock's log returns are normally distributed, its average annual log return = 100% and annual standard deviation (or volatility) = 200%. Given a trading year of 250 days, what are $\mu$ ...
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2answers
447 views

Statistical test of stock returns product

Say I have a sequence of stock returns: $X_1, ..., X_n$. Then I make a sample of products: $X_1X_2, X_2X_3, ..., X_iX_{i+1},..., X_{n-1}X_n$ How to test, if the sample mean is significantly different ...
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1answer
26 views

Should I use a multivariate analysis or N univariate analyses in this case? [closed]

I have 100 Investment funds (Flexible allocation Morningstar category, same investment area, currency and distribution status: the sample is homogeneous) over a 10 yrs period. I want to estimate a ...
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8 views

Appropriate statistical test for a repeated measures design with nested nominal variables

Context: Financial Portfolios Sample: time series slices of stock investments. Dependent Variable: stock value change during the slice. Independent Variable: Position change of investor during this ...
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1answer
153 views

Books on using SAS to analyze market risk

Is there a book that teaches you how to use SAS to analyze the market risk of a portfolio of stocks,bonds and options?
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6 views

How to calculate drawdowns

How do I calculate the drawdown history of a time series like the below chart? I basically just want to recreate it with updated data. I have been googling and have found max drawndown over a period ...
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2answers
518 views

Irregularly spaced time-series in finance/economics research

In financial econometrics research, it is very common to investigate relationships between financial time series that take the form of daily data. The variable will often be made $I(0)$ by taking the ...
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26 views

How to measure statistical significance of a non-binary-position trading strategy for an irregular time series?

What are the different ways to identify/measure whether a trade strategy is statistically significant? Specifically I have an irregular time series of individual trades between: other buyers and ...
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1answer
237 views

How can I identify market regimes with a Hidden Markov Model?

I am trying to identify market regimes (2 states: bull or bear) with percent changes in equity returns. Can you help me in the mathematicl modeling of this? So far, I thought that for each day, there ...
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13 views

Only positive elements in hedge portfolio in OLS regression (using R)

Its easy to built Hedge portfolios using OLS regression. The y variable are stock market returns of company i, and the X variables are (for example) the % exposure company i has in market k. It doens'...
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19 views

Why under an exponentially weighted moving average do volatility forecasts evolve more slowly over time if the decay factor λ tends towards unity?

For λ close to 1 volatility will evolve slowly over time, whereas volatility responds more rapidly when lambda is much smaller than unity. Conceptually, why is this the case?
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23 views

Deep Learning applied to Multivariate Inputs Vs Univariate Input Theory Question

I'm currently working through a time series problem where I'm trying to develop a model that learns the historical relationships between several related financial markets. So, using the closing prices ...
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1answer
196 views
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105 views

Is it a valid claim, that by differencing a time series, it loses its memory, and as a result its predictive power?

Marcos Lopez de Prado seems to be a well known and renowned machine learning expert in the field of finance. I am very far from his level, as have not yet finished my PhD in economics, and only have ...
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1answer
32 views

Can I remove a dummy variable when it is not significant by itself, but its interaction with another variable is?

I have the following model based on the financial returns of a company as a dependent variable of a stock market index, and a dummy variable interacting with USD exchange rates to my currency. The ...
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15 views

Basic question about dummy variables for breakpoint treatment

I am studying basic Econometrics and trying to understand how to deal with breakpoints using dummy variables. I found 3 significant break-points in my data (using 5% confidence) with the Chow ...
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2answers
41 views

strucchange::breakpoints giving implausible results

I'm trying to detect the breakpoints in Facebook's stock price with strucchange::breakpoints. ...
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1answer
305 views

A time series logit model with lagged dependent variable

I have a panel dataset for stocks. My goal is to model and predict if the stock will close positive (1) tomorrow based on today's close (1/0) and other macroeconomic and firm-specific variables.So I ...
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2answers
54 views

ML method to determine growth of accounts in a bank

Assume a bank has today N checking accounts, and also has 10 years history of the account balances. The history also includes related features such as "Allow overdraft" (Yes/No) and "Opening branch" (...
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30 views

Testing pricing errors on the SML for significance with R

I have been attempting to do a cross-sectional test of the CAPM. To do this, i have estimated the betas of 49 industry portfolios with time-series data. And then done a cross sectional regression, ...
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1answer
95 views

Implementation of Shanken (1992) Adjustement for Fama MacBeth Asset Pricing Tests

I am trying to implement an unconditional asset pricing test according to the Fama & MacBeth (1973) method. The calculation of the factor-loadings as average of monthly cross-sectional regressions ...
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1answer
275 views

classification using logistic regression on stock data

I have made a model which is supposed to classify the trend of a stock index as an "up day" (=1) or a "no change"/"down day"(=0), where I have coded an "up day" as when the percent change for the ...
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1answer
74 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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1answer
326 views

Support vector regression (LIBSVM) returns out of range outputs when I use out-of-sample data to predict one step ahead (MATLAB)?

I'm using SVR model in MATLAB R2016a using this option: options_z = ['-q -s 3 -t 2 -c ', C_param, ' -p ', epsilon, ' -g ,Kernel_scale]; I'm optimizing SVR ...
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3answers
487 views

How to calculate the expected loss of a credit card transaction?

I have used an algorithm to calculate the probability of a credit card transaction to be fraudulent. The algorithm outputs a classification (fraud/no fraud) and the probability of each, such that $P(\...
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0answers
25 views

Developing an appropriate volatility variable to predict stock returns based on past month

I am doing a project about the predictability of stock returns. I am using following regression model: \begin{equation} r_{t} = \alpha+\beta X_{t-1}+\epsilon_{t}, \end{equation} where $r_{t}$ is the ...
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0answers
17 views

Non-informative prior for the covariance matrix

I'm currently working on a project around the Bayesian approach to portfolio selection, and I can't manage to wrap my mind around the specification of the non-informative (diffuse) prior. Assuming ...
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1answer
104 views

Sample Covariance Matrix Computation

The covariance matrix has the property that it is positive semi definite. Occasionally when calculating the sample covariance matrix this is not the case. What can be done in these cases? Many ...
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4answers
7k views

Robust t-test for mean

I am trying to test the null $E[X] = 0$, against the local alternative $E[X] > 0$, for a random variable $X$, subject to mild to medium skew and kurtosis of the random variable. Following ...
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1answer
126 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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1answer
328 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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0answers
4 views

Aggregate Sentiment and Behaviour Index

I have data of sentiment and behavior based signals for certain stocks. They are based on positive, negative words in a document. How can I aggregate(like an index) those individual signals to ...
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0answers
31 views

Correspondence between time series models in continuous vs. discrete time

I am interested in an overview over the connection and correspondence between time series models in continuous vs. discrete time in finance. E.g. take ARMA(p,q) or GARCH(s,r) or ARMA(p,q)-GARCH(s,r) ...
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86 views

Reinforcement Learning - When to stop training?

I have built a deep reinforcement learning based portfolio optimisation agent. At a high level it is using macro economic data, valuations of the assets and a few technical indicators as the features. ...
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2answers
164 views

Quadratic problems with norm constraints in R

I'm trying to reproduce the results of DeMiguel et al. (2009), i.e. trying to obtain norm-constrained portfolios. To do so, I need to solve two optimization programs. Notations : $N$ is the number ...
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0answers
16 views

Calculate the annual returns of a portfolio with the given coefficients

I have to calculate the basic statistics of a stock portfolio: annualized yield, annualized volatility ... Here is an extract of the share prices: ...
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0answers
767 views

Cointegration with Multiple Structural Breaks

I am currently studying whether stock markets in the GCC region are cointegrated. All series are I(1); however, the Johansen test provides no robust evidence of cointegration. I then used the Bai ...
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0answers
15 views

Software Financial Performance [closed]

Which software is the best to evaluate on company financial performance? Currently I'm working on financial analysis for my company performance. It was quite confusing to see a variety of software ...
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3answers
2k views

Good books/papers on credit scoring

I'm looking for recomendations of books on credit scoring. I'm interested in all aspects of this problem, but mostly in: 1) Good features. How to build them? Which have been proved to be good? 2) ...