‘IntroductoryEconometricsforFinance’?ChrisBrooks20021Chapter1Introduction
‘IntroductoryEconometricsforFinance’?ChrisBrooks20022Introduction:
TheNatureandPurposeofEconometricsWhatisEconometrics?Literalmeaningis“measurementineconomics”.Definitionoffinancialeconometrics: Theapplicationofstatisticalandmathematicaltechniquestoproblemsinfinance.
‘IntroductoryEconometricsforFinance’?ChrisBrooks20023Examplesofthekindofproblemsthat
maybesolvedbyanEconometrician
1. Testingwhetherfinancialmarketsareweak-forminformationallyefficient.2. TestingwhethertheCAPMorAPTrepresentsuperiormodelsforthedeterminationofreturnsonriskyassets.3. Measuringandforecastingthevolatilityofbondreturns.4. Explainingthedeterminantsofbondcreditratingsusedbytheratingsagencies.5. Modellinglong-termrelationshipsbetweenpricesandexchangerates
‘IntroductoryEconometricsforFinance’?ChrisBrooks20024Examplesofthekindofproblemsthat
maybesolvedbyanEconometrician(cont’d)
6. Determiningtheoptimalhedgeratioforaspotpositioninoil.7. Testingtechnicaltradingrulestodeterminewhichmakesthemostmoney.8. Testingthehypothesisthatearningsordividendannouncementshavenoeffectonstockprices.9. Testingwhetherspotorfuturesmarketsreactmorerapidlytonews.10.Forecastingthecorrelationbetweenthereturnstothestockindicesoftwocountries.
‘IntroductoryEconometricsforFinance’?ChrisBrooks20025Frequencyquantityofdata Stockmarketpricesaremeasuredeverytimethereisatradeor somebodypostsanewquote.Quality Recordedassetpricesareusuallythoseatwhichthetransactiontookplace.Nopossibilityformeasurementerrorbutfinancialdataare“noisy”.?WhataretheSpecialCharacteristics
ofFinancialData?
‘IntroductoryEconometricsforFinance’?ChrisBrooks20026TypesofDataandNotation
Thereare3typesofdatawhicheconometriciansmightus