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An introduction to financial econometrics

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Topic: Econometrics

Sort Desciption: Financial econometrics is an active field of integration of finance economics ... an excellent book on a comprehensive overview of financial econometrics. ...

Content Inside: An introduction to financial econometrics Jianqing Fan Department of Operation Research and Financial Engineering Princeton University Princeton NJ 08544 November 14 2004 What is the financial econometrics? This simple question does not have a simple answer. The boundary of such an interdisciplinary area is always moot and any attempt to give a formal definition is unlikely to be successful. Broadly speaking financial econometrics is to study quantitative problems arising from finance. It uses sta- tistical techniques and economic theory to address a variety of problems from finance. These include building financial models estimation and inferences of financial models volatility estimation risk management testing financial economics theory capital asset pricing derivative pricing portfolio allocation risk-adjusted returns simulating financial systems hedging strategies among others. Technological invention and trade globalization have brought us into a new era of financial markets. Over the last three decades enormous number of new financial products have been created to meet customers demands. For example to reduce the impact of the fluctuations of currency exchange rates on a firms finance which makes its profit more predictable and competitive a multinational corporation may decide to buy the options on the future of foreign exchanges; to reduce the risk of price fluctuations of a commodity (e.g. lumbers corns soybeans) a farmer may enter into the future contracts of the commodity; to reduce the risk of weather exposures amuse parks (too hot or too cold reduces the number of visitors) and energy companies may decide to purchase the financial derivatives based on the temperature. An important milestone is that in the year 1973 the worlds first options exchange opened in Chicago. At the very same year Black and Scholes (1973) published their famous paper on option pricing and Merton (1973a) launched general equilibrium model for security pricing two la ...

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