Theory and Econometrics of Financial Asset Pricing

402 Pages·2022·8.774 MB·English

by  Kian Guan Lim

KianGuanLim
TheoryandEconometricsofFinancialAssetPricing

Kian Guan Lim
Theory and
Econometrics of
Financial Asset Pricing
|
ISBN978-3-11-067385-2
e-ISBN(PDF)978-3-11-067395-1
e-ISBN(EPUB)978-3-11-067401-9
LibraryofCongressControlNumber:2022939228
BibliographicinformationpublishedbytheDeutscheNationalbibliothek
TheDeutscheNationalbibliothekliststhispublicationintheDeutscheNationalbibliografie;
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Preface
Thisbookispedagogicalinnatureandwillprovideafirmfoundationintheunder-
standing of financial economics applied to asset pricing. The covered materials in-
cludeanalysesof stocks,bonds,futures,and options.Existinghighlycitedfinance
modelsareexplainedandusefulreferencesareprovided.Thediscussionoftheoryis
accompaniedbyrigorousapplicationsofeconometrics.Econometricscontaineluci-
dationsofboththestatisticaltheoryaswellasthepracticeofdataanalyses.Linear
regressionmethodsandsomenonlinearmethodsarecovered.
Thecontributionofthisbook,andatthesametime,itsnovelty,isinsynergisti-
callyemployingmaterialsinprobabilitytheory,economicsoptimization,economet-
rics,anddataanalysestogethertoprovideforrigorouslearningininvestmentandem-
piricalfinance.Thisbookiswrittenatalevelthatisacademicallyrigorousformasters
levelaswellasadvancedundergraduatecoursesinfinance,financialeconometrics,
andquantitativefinance.Itisalsousefulforfinanceandbankingprofessionalswho
wishtobetterequipthemselves.
June2022 KianGuanLim
https://doi.org/10.1515/9783110673951-201

Contents
Preface|VII
1 ProbabilityDistributions|1
1.1 BasicProbabilityConcepts|1
1.1.1 CollectionofEvents|1
1.1.2 RandomVariables|4
1.1.3 DistributionFunction|5
1.1.4 SomeMoments|6
1.1.5 Independence|8
1.2 ProbabilityDistributions|8
1.2.1 BinomialDistribution|8
1.2.2 Application:GamesofChance|10
1.2.3 PoissonDistribution|13
1.2.4 Application:CreditDefaultSwap|17
1.2.5 UniformDistribution|17
1.2.6 NormalDistribution|18
1.2.7 RelatedDistributions|20
1.3 EstimationandHypothesisTesting|22
1.3.1 StatisticalTesting|25
2 SimpleLinearRegression|28
2.1 SimpleLinearRegression|28
2.2 OLSMethod|31
2.2.1 Forecasting|38
2.3 Gauss–MarkovTheorem|40
2.4 Decomposition|43
2.5 StockIndexFutures|46
2.5.1 CostofCarryModel|47
2.6 Hedging|54
3 CapitalAssetPricingModel|57
3.1 ExpectedUtilityTheory|57
3.1.1 ChoicesUnderUncertainty|58
3.2 UtilityFunctions|62
3.2.1 TaylorSeriesExpansion|64
3.2.2 MaclaurinSeries|66
3.3 RiskAversion|66
3.3.1 ApplicationofVMExpectedUtility|69
3.3.2 ValueofInformation|69
3.4 Single-PeriodCAPM|71
X | Contents
3.4.1 Estimation|76
3.4.2 Application:CAPMRegression|78
3.4.3 InterpretationofRegressionResults|80
3.4.4 Testing|83
3.5 PerformanceMeasures|85
4 EventStudies|90
4.1 SetOperations|90
4.1.1 Bayes’Formula|91
4.2 MarketEfficiency|92
4.3 ConditionalExpectation|94
4.3.1 Application:Value-at-Risk|97
4.4 MovingAcrossTime|98
4.4.1 LawofIteratedExpectations|105
4.4.2 Application:AssetPricing|106
4.5 Events|108
4.5.1 TestingFramework|109
4.5.2 Benchmark|110
4.5.3 TestStatistics|115
4.6 CaseStudy:BankofAmericaAcquiresMerrillLynch|119
5 TimeSeriesModeling|123
5.1 StochasticProcess|123
5.1.1 SomeImportantInequalities|124
5.2 LawofLargeNumbers|124
5.2.1 ConvergenceConcepts|125
5.3 CentralLimitTheorem|131
5.3.1 Applications|134
5.4 StockReturnRates|135
5.4.1 TestofNormality|137
5.4.2 CaseStudy:AmericanExpressCompanyStockReturns|137
5.5 TimeSeriesModels|140
5.6 AutoregressiveProcess|143
5.7 MovingAverageProcess|145
5.8 AutoregressiveMovingAverageProcess|145
5.8.1 ChangingConditionalMeans|146
5.9 SampleAutocorrelationFunction|147
5.10 TestofZeroAutocorrelationsforAR(1)|149
5.10.1 InvertibleMAProcesses|151
5.10.2 Yule-WalkerEquations|152
5.11 PartialAutocorrelationFunction|153
5.11.1 Application:GDPGrowth|155