FMS161/MASM18 Financial Statistics Lecture 1, Introduction and stylized facts. Erik Lindström

Transcription

1 FMS161/MASM18 Financial Statistics Lecture 1, Introduction and stylized facts Erik Lindström

2 People and homepage Erik Lindström:, , MH:221 (Lecturer) Carl Åkerlindh:, , MH:223 (Computer exercises) Sidi Mohamed Aly:, , MH:125a (Computer exercises) Maria Lövgren:, , MH:225 (Course secretary)

3 Purpose: The course should provide tools for analyzing data, and use these tools in combination with economic theory. The main applications are valuation and risk management. The course is intended to provide necessary statistical tools supporting courses like 'TEK180 Financial Valuation and Risk Management' or 'FMSN25/MASM24 Valuation of Derivative Assets'.

4 Recommended courses: Mathematical statistics: FMS045/MASC04 Stationary processes (G2), FMSF05/MASC01 Probability theory, intermediate course (G2), FMS051/MASM17 Time series analysis (A), FMS155/MASM15 Extreme Value Theory (A), FMS170/MASM19: Valuation of Derivative Assets (A) and FMS161/MAS18: Financial Statistics (A). Economics: TEK135 Microeconomics (G2), TEK180 Financial Valuation and Risk Management (A), TEK103 Financial economics, advanced course (A), TEK110 Empirical Financial economics (A) Other: Programming, Optimization, Mathematical analysis, Prob. theory and numerical methods...

5 Inference problems? Forecast future prices, interest rates, volatilities (P and Q) Filtering of data (e.g. estimating hidden states such as stochastic volatility) Distribution of prediction errors; can we improve the model? What about extreme events? How do we estimate parameters in general models? Cross covariance and auto covariance. Non-linear, Non-Gaussian, Non-stationary...

6 Example I -- Daily interest data - big crisis in Sweden during the early 1990s STIBOR and REPO Yields REPO STIBOR 1W STIBOR 1M STIBOR 3M STIBOR 6M Q1 92 Q2 92 Q3 92 Q4 92 Q1 93 Models and distributions. Forecasts % or 500 %? Events Covariation with of market factors?

7 Example II -- Forward prices on Nordpool Traders are interested in predicting price movements on the futures on Nordpool on yearly contracts. Or predicting the movements on short horizons (days or weeks). Expected movement and/or prob. of declining prizes. What about fundamental factors? 1. Hydrological situation is the energy stored as snow, ground water or in reservoirs 2. Time to maturity. 3. Perfect or imperfect markets. Other factors -- suggestions?

8 Electricity spot price and Hydrological situation

9 Ex -- Forwards on Nordpool, contd. There is a strong dependence between the hydrological situation and the price. How do we model this dependence, e.g. what model should we use? Is the relation linear? How do we estimate the chosen model? How do we know if the model is working (or is good enough)? One supermodel or several models? Adaptive models?

10 Contents The course treats estimation, identification and validation in non-linear dynamical stochastic models for financial applications based on data and prior knowledge. There are rarely any absolutely correct answers in this course, but there are often answers that are absolutely wrong.

11 Contents The course treats estimation, identification and validation in non-linear dynamical stochastic models for financial applications based on data and prior knowledge. There are rarely any absolutely correct answers in this course, but there are often answers that are absolutely wrong. This was expressed by George Box as All models are wrong-- but some are useful! Think for yourself, and question the course material!

12 Contents, 2 Discrete and continuous time. Parameter estimation, model identification and model validation. Prediction. Modelling of variance, ARCH, GARCH,..., and other approaches. Calibration Risk Stochastic calculus and SDEs. State space models and filters Kalman filters (and versions thereof) and particle filters

13 Course goals -Knowledge and Understanding For a passing grade the student must: handle variance models such as the GARCH family, stochastic volatility, and models use for high-frequency data, use basic tool from stochastic calculus: Ito's formula, Girsanov transformation, martingales, Markov processes, filtering, use tools for filtering of latent processes, such as Kalman filters and particle filters, statistically validate models from some of the above model families.

14 Course goals -Skills and Abilities For a passing grade the student must: be able to find suitable stochastic models for financial data, work with stochastic calculus for pricing of financial contracts and for transforming models, understand when and how filtering methods should be applied, validate a chosen model, solve all parts of a modelling problem using economic and statistical theory (from this course and from other courses) where the solution includes model specification, inference, and model choice, utilise scientific articles within the field and related fields. present the solution in a written technical report, as well as orally,

15 Literature Lindström, E., Madsen, H., Nielsen, J. N. (2015) Statistics for Finance, Chapman & Hall, CRC press. Handouts (typically articles on the course home page) Course program.

16 Properties of financial data No Autocorrelation in returns Unconditional heavy tails Gain/Loss asym. Aggregational Gaussianity Volatility clustering Conditional heavy tails Significant autocorrelation for abs. returns - long range dependence? Leverage effects Volume/Volatility correlation Asym. in time scales Evaluate claims on OMXS30 data.

17 Autocorrelation in returns Autocorrelation, returns lag No or little autocorrelation.

18 Unconditional distribution Normal Probability Plot Probability Data Normplot of the unconditional returns.

19 Gain/Loss asym. OMX S log(index) 10 2 Jan95 Jan00 Jan05 Jan10 Jan15 Losses are larger than gains (data is log(index)). This may contradict the EMH (See Nystrup et al. (2015) paper on the home page).

20 r Aggr. Gaussianity r Normal Probability Plot Data Normal Probability Plot Data r2 r Normal Probability Plot Data Normal Probability Plot Data r4 r Normal Probability Plot Data Normal Probability Plot Data Returns are increasingly Gaussian. Interpretation?

21 Vol. Clustering Nov91 Nov94 Nov97 Nov00 Nov03 Nov06 Volatility clusters. Average cluster size?

22 Conditional distribution Normal Probability Plot Nov91 Nov96 Nov01 Nov06 Probability Data Normplot of the conditional returns (GARCH(1,1) filter).

23 Dependence in returns Autocorrelation, abs returns lag Significant autocorrelation. Long range dependence or other reason?

24 Leverage effects Most assets are negatively correlated with any measure of volatility. One popular explanation is corporate debt. Makes sense if you are risk averse.

25 Volume/Volatility correlation Trading volume is correlated with the volatility. Sometimes modelled with 'business time' in option valuation community - cf. Time Shifted Levy processes models, Def 7.12, such as NIG-CIR model.

26 Asym. in time scales Coarse-grained measurements can predict fine scaled volatility While fine scaled volatility have difficulties predicting coarse scale volatility

27 Extra material Feel free to download the paper (you need a Lund University IP - address to access the paper.) Cont, R. Empirical properties of asset returns: stylized facts and statistical issues. Quantitative Finance, Vol. 1, No. 2 (March 2001)

28