Beruflich Dokumente
Kultur Dokumente
Markus Haas
April 9, 2016
Econometrics of Financial Markets
1
Econometrics of Financial Markets
2
Course Outline
• Introduction
3
Textbooks
4
Textbooks
• Tsay, R.S. (2010), Analysis of Financial Time Series, 2e, Wiley, New
York.
5
Other useful books
6
Asset Return Definitions
Pt
1 + Rt = . (2)
Pt−1
• Often the returns defined in (1) and (2) are multiplied by 100 to be
interpretable in terms of percentage returns.
7
Asset Return Definitions
• If an asset pays a dividend, Dt, between time t − 1 and t, then the return
is
Pt + Dt − Pt−1 Pt − Pt−1 Dt
Rt = = + , (3)
Pt−1 Pt−1 Pt−1
where the term (Pt − Pt−1)/Pt−1 is the capital gain, and Dt/Pt−1 is the
dividend yield.
8
Asset Return Definitions
• Its name derives from the fact that (4) can be rewritten as
Pt = Pt−1ert , (5)
9
Asset Return Definitions
1
Note that expansion (8) is valid only for Rt ∈ (−1, 1]; the approximation is very good at least for Rt
between −0.1 (–10%) and 0.1 (10%), cf. Table 1.
10
Asset Return Definitions
• E.g., daily returns are very rarely outside the range from −10% to 10%,
and then the choice of the return definition will be of minor importance.
11
discrete return Rt
0.25
log-return log(1 + Rt )
0.2
0.15
0.1
Rt , log(1 + Rt )
0.05
−0.05
−0.1
−0.15
−0.2
−0.25
−0.25 −0.2 −0.15 −0.1 −0.05 0 0.05 0.1 0.15 0.2 0.25
Rt
12
Asset Return Definitions
13
Asset Return Definitions
τY
−1
1 + Rt(τ ) = (1 + Rt−i), (9)
i=0
and sums of random variables can be more easily handled than products.
• Also, due to limited liability, most asset prices have a lower bound of
zero, i.e., Rt ≥ −1, which is easier to preserve in models based on
continuous returns.2
2
However, distributions with unbounded support, such as the normal, may still be used as an
approximation for discrete returns, since, when fitted to return data, the implied probability of a loss larger
than 100% will be negligible. The same reasoning of course applies to basically any application of such
distributions to real world data, which are usually restricted to a finite-length interval.
14
Asset Return Definitions
• Let
– Pit be the price of asset i at time t, and
– Rit be the return of asset i,
i = 1, . . . , N , where N is the number of assets in the portfolio.
15
Asset Return Definitions
N
X
Pp,t−1 = ni Pi,t−1, (10)
i=1
and asset i’s portfolio weight (i.e., the fraction of wealth invested in
asset i) is
niPi,t−1
xi = N , i = 1, . . . , N, (11)
P
nj Pj,t−1
j=1
with
N
X
xi = 1. (12)
i=1
16
Asset Return Definitions
Pp,t − Pp,t−1
Rt,p =
Pp,t−1
P P
n
i iP P it − i ni Pi,t−1
=
i ni Pi,t−1
P
inPi (Pit − Pi,t−1)
=
i ni Pi,t−1
XN
niPi,t−1 Pit − Pi,t−1
= P
i=1 i ni Pi,t−1 Pi,t−1
N
X
= xiRi,t.
i=1
17
Asset Return Definitions
18
Asset Return Definitions
• However, for small returns, the difference is again moderate, and the
approximation
N
X
rp,t ≈ xirit (13)
i=1
is also frequently used.
19
Basic Statistical Properties of Returns: Marginal
(Unconditional) Return Distribution
• Due to the uncertain nature of the returns of speculative assets, they are
best treated as random variables.
• Daily log–returns, for example, are the sum of a large number of intraday
returns.
20
Marginal (Unconditional) Return Distribution
21
Kernel Density Estimation
that is,
1
f (x) = lim Pr(x − h < X < x + h). (15)
h→0 2h
b 1
f (x) = {number of observations in (x − h, x + h)} , (16)
2hT
22
Kernel Density Estimation
XT
1 1 x − Xt
fb(x) = w , (17)
T t=1 h h
23
• This has been produced using a (pseudo) random sample of size T = 100
from a N(0,1) distribution and h = 12 .
0.45
estimate (h = 0.5)
0.4
N(0,1) density
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
−4 −3 −2 −1 0 1 2 3 4
24
Kernel Density Estimation
R
• In general, the kernel must be a density, i.e., K(x) ≥ 0 and K(x)dx =
1.
25
Kernel Density Estimation
XT
1 1 x − X t
fb(x) = K , (20)
T t=1 h h
• For example, consider daily log–returns of the DAX 30 index from January
2000 to May 2013 (T = 3477 observations), with h = 0.05 and h = 0.5.
26
density of daily DAX returns
0.6
kernel (h = 0.05)
0.5
0.4
0.3
0.2
0.1
0
−8 −6 −4 −2 0 2 4 6 8
27
density of daily DAX returns
0.6
kernel (h = 0.05)
kernel (h = 0.5)
0.5
0.4
0.3
0.2
0.1
0
−8 −6 −4 −2 0 2 4 6 8
28
Kernel Density Estimation
• How to choose h?
• On the other hand, a large h reduces random variation but may hide
important details of the density.
29
Kernel Density Estimation
• Trying to choose h optimally (in the MSE4 sense) shows that the optimal
h depends on T (the sample size), the kernel, and, unfortunately but not
surprisingly, the true density (which is unknown).
30
S&P 500 index level (daily), January 2000 to October 2011
130
120
110
100
90
80
70
60
50
2000 2002 2004 2006 2008 2010 2012
31
S&P 500 index returns (daily), January 2000 to October 2011
15
10
−5
−10
2000 2002 2004 2006 2008 2010 2012
32
DAX 30 index returns (daily), January 2000 to October 2011
15
10
−5
−10
2000 2002 2004 2006 2008 2010 2012
33
Kenrel density estimate of S&P 500 return density
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
−8 −6 −4 −2 0 2 4 6 8
34
Kernel Density Estimation
• We compare the kernel estimate with a fitted normal, i.e., with the
density
2
1 (x − µb)
f (x) = √ exp − 2
,
2πb
σ 2bσ
where
T
1X
µ
b=r= rt
T t=1
and
XT
1
b 2 = s2 =
σ (rt − r)2
T − 1 t=1
are the sample mean and variance, respectively.
35
Density of S&P 500 returns
0.5
empirical (kernel)
0.45 fitted normal
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
−8 −6 −4 −2 0 2 4 6 8
36
The log–density helps to better detect differences in the tails:
0
Log−Density of S&P 500 returns
10
empirical (kernel)
10
−1
fitted normal
−2
10
−3
10
−4
10
−5
10
−6
10
−7
10
−8
10
−9
10
−8 −6 −4 −2 0 2 4 6 8
37
Density of DAX 30 returns
0.4
empirical (kernel)
0.35
fitted normal
0.3
0.25
0.2
0.15
0.1
0.05
0
−8 −6 −4 −2 0 2 4 6 8
38
0
Log−Density of DAX 30 returns
10
empirical (kernel)
fitted normal
−1
10
−2
10
−3
10
−4
10
−5
10
−6
10
−8 −6 −4 −2 0 2 4 6 8
39
Basic Statistical Properties of Returns: Excess Kurtosis
(Thick Tails)
• In particular, they have much more probability mass in the center and
the tails (fat tails) than a normal distribution with the same variance.
• This implies, among other things, that the probability of large losses is
much higher than under the Gaussian assumption, which is of considerable
interest for many financial applications.
40