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Questions tagged [finance]

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

166 questions with no upvoted or accepted answers
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6
votes
0answers
336 views

Empirical distribution function of overlapping time series data

If we model asset return volatility for periods of more than one (say more than one day) there is the square-root rule which holds true under some assumptions. On the other hand practitioners ...
5
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0answers
72 views

Using overlapping data as if it was not

I am looking again at a popular statistical testing method used in finance, suspect it's a bit naughty, but would like to have a more experienced eye take a look also. The method is the following, ...
5
votes
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 (...
5
votes
1answer
2k views

How to model time-varying correlation

Suppose I have two time-series variables, $\{x_t\}$ and $\{y_t\}$, where $t\in[1,T]$. I would like to model the correlation $\rho(x_t,y_s)$ as some function of $t$,$s$, and the difference $t-s$. In ...
4
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0answers
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. ...
4
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0answers
301 views

Cumulative Abnormal Returns (CARs) vs ARIMAX

What is the difference in using an ARIMA model with covariates ($X_i$) to estimate the shock of $X$ on time series $Y$ and using a Cumulative Abnormal Returns (CAR)? I have limited knowledge about ...
4
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0answers
232 views

Panel data model for exports and exchange rates

Suppose I have 4 years worth of monthly panel data on: exports of widgets $y$ from home country to 12 different nations (in US dollars) nominal exchange rates $x$ for those 12 countries (in US ...
4
votes
0answers
383 views

Independent t-tests and Technical Indicators: Voodoo, Axes, and Objectivity

First off, I'm not trying to crowd source a personal printing press (i.e., not doing this: "I'm using strategies $x$, $y$, $z$ in the stock market and..."). Instead, I'm looking for feedback on ...
4
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0answers
250 views

Had statisticians predicted 2008 financial crisis?

Are there any statistical or econometric studies before 2008 that predicted 2008 financial crisis? Note that there are some publications that attemp to predict contagion between markets using copula ...
4
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0answers
811 views

Efficient Portfolio Optimization Through Simulation

Apologies in advance for the (possibly?) poor terminology as I'm a bit of a novice in the field. I was torn whether to ask this on stackoverflow or here, so hope its the right place. Anyway, my ...
3
votes
0answers
158 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 ...
3
votes
0answers
542 views

Medium Frequency Trading - Better labelling strategy?

The mid-price at time $t$ is denoted by $$p_t = \frac{s_t^{a,1} + s_t^{b,1}}{2}.$$ This mid-price can evolve in minimum increments of half a tick but is almost always observed to move at ...
3
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0answers
102 views

Can non-parametric tests, e.g. Mann-Whitney U, be used on non-normally distributed statistics off of bootstrap samples?

I have some return data from some different portfolios which I would like to compare using risk vs return ratios. The standard Sharpe ratio has a nice solution for calculating the significance of the ...
3
votes
0answers
507 views

Neural networks and signal-to-noise ratio

My guess is that neural networks do not work very well in noisy environments, i.e. the lower the signal-to-noise ratio, the worse the result of a neural network, if compared to other statistical ...
3
votes
0answers
218 views

Forecasting demand with out-of-stock data

Usually retailers have a service level that is below 1.0, which means that share of products is out-of-stock some of the time. What is the best practice or possible ways of using out-of-stock data to ...
3
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0answers
106 views

Analysis of proportions over time

My knowledge of statistics is limited and I am looking for resources to read on the matter if possible. Anyways, I am currently trying to estimate a confidence interval for a proportion over time. ...
3
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0answers
2k views

How can I convert annual standard deviation to a longer period?

Quicken provides annual standard deviation of returns for a given portfolio using analysis done by the Newport Group. I'd like to convert this to a longer term number--say 10, 20, or 30 years. ...
3
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0answers
125 views

Fitting series to a distribution

I am reading this note on Mean-CVAR optimization. The authors argue against the prevailing assumption that asset classes are normally distributed and propose using a truncated levy flight distribution ...
3
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0answers
792 views

Implication / Interpretation of long term equilibrium VECM

I want to test the influence of exchange rates on a price index and struggle with the interpretations. My variables are I(1) First, I ran an OLS on first differenced variables which indicated a ...
3
votes
0answers
740 views

Time Series: correcting the standard errors in a huge panel time series data set

I have stock returns at every 5 minute interval of each trading day for over 2 years for 40 stocks. I want to run a Fama-Macbeth regression by time interval (5min intervals) and then correct the ...
3
votes
0answers
199 views

Is is correct to compare t-statistics of different pairs of cointegrated timeseries?

I am testing for cointegration all the pairs from a set of 100 stocks. I run an Ordinary Least Square Regression on each pair and then I test for the existence of unit roots in the residuals. I am ...
3
votes
0answers
494 views

Bayesian estimation using Gibbs sampling for financial models

I am trying to do Gibbs sampling, from this paper. This is a CIR financial model, I want to do Gibbs on its parameters: $$y(t+{\Delta}^{+})=y(t)+(\alpha-\beta y(t)){\Delta}^{+}+\sigma \sqrt{y(t)}{\...
2
votes
1answer
63 views

Calculating portfolio volatility from portfolio returns vs. from covariance matrix

I'm having trouble understanding the difference in calculating portfolio volatility via the portfolio returns vs. via the covariance matrix. To be more specific: I understand that on the individual ...
2
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0answers
28 views

Decomposition of interest rate risk premia

I have a question on econometric modelling techniques for decomposition. I have three variables: - V1 which is an indicator of an interest rate risk premia - V2 which is an indicator of a credit risk ...
2
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0answers
54 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 ...
2
votes
0answers
105 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 ...
2
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0answers
205 views

Random Forest for financial networks modelling

One of the hottest topics in today econometrics is financial networks models where researches use vector autoregressive (VAR) models applied to time series of daily volatility measurements of ...
2
votes
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 ...
2
votes
0answers
53 views

Moving from discrete sum of changes to continuous integral of local covariance - how is this done?

I'm trying to derive a specific relationship about the relationship between forwards and futures. The expression is from the paper, "The relationship between forward and futures prices", written 1981 ...
2
votes
0answers
20 views

How do we get the variance for five or more assets (actions)?

For a finance project I have to compute my portfolio's variance. I know that for two asset(actions) it is : But what is the variance for five or more assets (actions) ? Is it : $$\operatorname {...
2
votes
0answers
54 views

beta distribution and Yale crash indice

I am trying to use Yale stock market crash confidence indice to make a crash probability estimate. The Crash Confidence Index is the percentage of respondents who think that the probability of a crash ...
2
votes
1answer
92 views

Why model data using parametric distributions instead of empirical?

I've been wondering why the use of empirical distributions in research is not as prevalent as I think it should be given my understanding (likely misinformed) that an empirical distribution would give ...
2
votes
0answers
67 views

How to test hypothesis on the composition of CAPM portfolios

I'm facing two different portfolios in CAPM framework derived as $$\hat{\omega}_P=\hat{\Sigma}^{-1}\frac{E(r)-r_f}{H}(\hat{\mu}-\iota'r_f)$$ on the same assets but, for example, on different time ...
2
votes
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 ...
2
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0answers
176 views

Estimating a VAR model with variable coefficients

I want to estimate a VAR model based on the Dufour and Engle paper "Time and the Price Impact of a Trade" (2000). There, the parameter $ b_{i} $ of the endogenous variable $ x_{i} $ is dependent on ...
2
votes
0answers
56 views

An investment and variance question for monthly payments

I have a question regarding a financial/statistical problem. How do you calculate the variance of the outcome of an investment in a stock, when the investment is so called time diversified, i.e. ...
2
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0answers
79 views

Comparison of stock market volatilities

I was trying to compare the volatilities of the stock market index of China and America. But I realized that a direct comparison of historical data would not be fair. The Chinese market has a rule ...
2
votes
0answers
240 views

What does this formula (to derive the annualized volatility for the VaR) mean?

I'm faced with the formula shown in the image below, which I just don't understand, in part because I've no grounding in stats, and in part because I don't even understand the notation: What's going ...
1
vote
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 ...
1
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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) ...
1
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0answers
32 views

Prediction of financial time series

I have several questions. I will split the text up in one high-level description of the goal of my exercise, a detailed description of my potential solution and finally my actual questions. Please ...
1
vote
0answers
49 views

Can I log-transform realized volatility in a co-integration setting

I'm writing my master's thesis and looking to see if there exists fractional co-integration between the volatility of some large stock-indices. My estimates of realized volatility are based on the ...
1
vote
0answers
43 views

Estimating and forecasting stock and option prices with GARCH models

I am new in the field of time series. I wonder why there is not enough literature about GARCH models used to predict stock or option prices? In other words, is it reasonable to use a general ...
1
vote
0answers
84 views

Determination or AR and MA parameters

I have in my possession price and time of different trade from an auction. The price series isn't stationnary so I work with the log return series. I'd like to forecast the evolution of the log return ...
1
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0answers
70 views

How do unsupervised credit scoring models that don't consider historical financial data work?

There seems to be a number of startups (Zest Finance, Credolab etc.) that provide credit scoring schemes that rely exclusively on alternative data without considering users historical financial data ...
1
vote
0answers
25 views

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 ...
1
vote
0answers
38 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 ...
1
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0answers
13 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 ...
1
vote
0answers
131 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 ...
1
vote
0answers
215 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 ...