Financial Econometrics


Aims

The aim of this course is to study modern econometric and time series techniques that are widely used in various financial applications such as portfolio management and risk management. After passing the course, students are able to apply advanced econometric tools for modeling and forecasting asset returns and their volatility and correlation. In particular, they are able to do model specification, parameter estimation and inference, specificiation testing, and forecasting.

Information

This course surveys modern econometric and time series techniques that are used for modeling and forecasting asset returns and volatility. Many of these tools were developed not from theory but from practice. We therefore start this course by documenting the most important stylized facts of asset returns, which any model should capture in order to be useful. These features include non-normality, non-linearity, calendar effects, effects of macroeconomic news announcement, and volatility clustering. In the first part of the course, we focus on modeling and forecasting the conditional mean of asset returns. We discuss relevant issues in "backtesting" of forecasting models, including recursive estimation, variable selection, selection among (and combination of) competing forecasting models, and the evaluation of forecasts. Additional topics include the choice of forecast horizon, the choice of financial loss function, and handling structural change and nonlinearity. In the second part of the course, we discuss models for asset return volatility, including GARCH and stochastic volatility models, from both a theoretical and empirical perspective. In addition to univariate models, we also consider multivariate models that describe the correlation among different asset returns. The use of high-frequency data to measure and forecast volatility and correlation is discussed as well.

Assessment

Assignments, essays (20%)

Written (re-)examination with open questions (80%)

Materials

  • Taylor, S.J. (2007), Asset Price Dynamics, Volatility, and Prediction, Princeton University Press (ISBN: 978-0-691-13479-6)
  • Collection of journal articles and working papers

Additional info

More exercises will be provided to improve understanding of the lecture material and prepare for the exam. In the lectures more attention will be given to these exercises.