Quantitative Finance

Quantitative Finance

  • Carmen González-Velasco added an answer:
    What is reliable unit root test to be tested first before apply structural break test?

    I will employ the structural break test in my study to find the exact date of global financial crisis. But before apply the structural break, I will run for unit root first. My question, what is the reliable unit root test to testing for stationary if I apply the structural break test. In my research proposal, I use ADF test, PP test and KPSS test. Is it reliable? or should I employ the zivot-andrew test to exchange withthe KPSS test. Thank you for your helps.

  • Soumitra K Mallick added an answer:
    Who are the top researchers in Behavioral finance?
    Who are they, what are they researching and what are the universities leading the topics?
    Soumitra K Mallick

    Dear Prof. Forte,

                                  I have used Bounded Rationality to explain Incomplete Markets right with my PhD thesis at NYU and in a number of publications in Asset Management, Quantitative Finance & Mathematical Finance and in also some Genetic Algorithmic Physics models. Now if Bounded Rationality is the effect of Complexity of the Environment then I have derived the Information and Energy Meanfields as in Quantum Physics and published in to class Physics journals. So although not many I do have top class publications in both Behavioral Finance & Mathematical Finance & Physics. But of course due regards to Prof. Thaler and others.SKM PhD QC FEPS(D)

  • Soumitra K Mallick added an answer:
    How do I calculate asset allocation policy of a mutual fund asset allocation?

    Must I take the unquoted shares also?

    Soumitra K Mallick

    Dear Bheergoonath,

                                          In the interests of making your asset market efficient of the Strong Form i.e. with specialists (turnpike) you should not try to replicate the mutual fund strategies but try to calculate its quantitative financial performance using the CAPM i.e. by using risk-return trade offs over and above market performance of funds. You can take as look at my SW & Management of Stock Markets paper on my RG page if you would like to.SKM QC FEPS(D)

  • Victor Peirone added an answer:
    Predetermined and endogenous variables in the Euler investment model?

    Hello, I am using the Euler investment model on a panel of firm level data. My question is about identifying the predetermined and endogenous variables in the model since I am using system GMM for estimation. Independent vars I am considering are (lagged dep var, lagged squared dep var, cash flow to capital stock, sales to capital stock, debt to capital stock).

    Many thanks for help

    Victor Peirone

    Dear Ahmad,

    From the financial acceleration point of view you should add profits to capital stocks and a proxy of financial cost (interest rate, etc.).


    I used GMM in my thesis including also tax variables. In my case focused on the affects of taxation over capex.

  • Soumitra K Mallick added an answer:
    When should we use SUR instead of fixed or random effect model?

    We are doing research on capital structure. To the best of my knowledge, researchers usually applied panel with fixed of random effect. Few studies use SUR when they focused on macro variables. When should we use SUR in stead of panel with fixed or random effect? As the results I got quite different when running SUR. Many thanks 

    Soumitra K Mallick

    All of them are used in Simultaneous Equation Models. So that is the similarity. SURE is used when you are not "sure" about what are the structural equations so you include some SUR regressions trying to capture additional information. That's the best advice I can give. SKM QC FEPS

  • Soumitra K Mallick added an answer:
    Can anyone recommend good papers on market making and finance?


    I'm trying to learn the theory of market making strategy (eg. what strategies are employed in exchanges such as NASDAQ, NYSE etc...), but am very new to the field of finance.  Can anyone recommend some good papers on market making strategies, as well as more general papers on quantitative finance?

    Sorry, I know this is a broad question, but it would be very helpful!

    Soumitra K Mallick

    Dear Dr. Hughes,

                                   You should definitely take a look at "Information in Securities Markets: Kyle Meets Glosten and Milgrom", Back, K. and Baruch, S. (2004), Econometrica, 72: 433–465. doi: 10.1111/j.1468-0262.2004.00497. and the references therein. You can also take a look at my paper on "Political Environment and Financial Markets" on my RG page which models and sights literature on Market Microstructure. I hope it is of some help. SKM QC

  • Soumitra K Mallick added an answer:
    Is it possible to effectively compare and rank the UK construction industry globally in terms of productivity?

    While various variables like currency exchange rate, labour input etc make it difficult to distinguish between countries in term of construction productivity, is it still possible to get a ranked synopsis?

    Soumitra K Mallick

    Dear Angus,

                          I cannot tell you specifically about housing but I can tell you that if you are looking for an understanding of Ricardian Rent Theory which affects the housing market so much you can take a look at my paper on Econometric Society Conferences on my Rg page and also on www.citations.springer.com/item?doi=10.1007/PL00004119 where I have provided the factorisation necessary for valuing networks using the opportunity cost of rent. I guess you can reverse the process and the calculation. I hope it helps. Just as a theoretical argument David Ricardo also did not value rent in terms of Real Estate perse but in terms of Commerce or Corn. SKM QC

  • Soumitra K Mallick added an answer:
    How do you measure money and liquidity in a financial market?

    How do you measure money and liquidity in a financial market?

    Soumitra K Mallick

    If you are looking for liquidity in financial markets and its impact and by financial markets I presume you mean stock markets primarily, I have published some research which have contingent convergence properties to Arrow-Debreu type of money metric equilibrium, following stochastic Borel-Cantelli theorems dependant on interest elasticity of stock demand., dependant on interest cost of companies and dividend distributed per share indexed by specific industries or portfolios. You will find these published papers as mathematical-statistical pricing....... and testing for Pareto Optimality...... on my RG page, if you would like to take a look. SKM QC

  • Jan Leicht added an answer:
    What is the difference between two tracking error calculations for passive mutual funds widely used in academia?

    I am interested in why different measures are used to calculate TE; specifically, why TE is often calculated as the standard deviation of portfolio and benchmark returns or as the standard deviation of residuals from a regression of portfolio returns on benchmark returns, that can be decomposed into factor returns of the benchmark.

    Though both measures are widely used and at least for the first calculus a clear drawback is that if constant return differences are found TE is incorrectly 0, I don't see how the second calculation would address this problem or what problem is addressed using this alternative calculus?

    Any suggestion is highly appreciated! Many thanks in advance!

    Jan Leicht

    First of all thanks for your hints, much appreciated. Though I keep struggling that TE is of any use in performance evaluation for active portfolios, I definetely see your points. Today, I found a hint that this measure helps differentiating risks caused by physical and synthetical replication; also the residuals would capture any deviation from a full-cash position in a perfectly replicating portfolio, which also is meaningful as the other TE measure technically assumes a beta of 1 (in case of CAPM).

  • Chifundo Mchowa added an answer:
    Can a VAR model be used for estimation even when the stability test show that VAR is not stable?

    can a VAR model be used for estimation even when the stability test show that VAR is not stable?

    Chifundo Mchowa

    Thank you very much have found this helpfull

  • Soumitra K Mallick added an answer:
    How do I test for time effects in cross section data?

    I have cross-sectional data (1999 - 2014) and I want to regress some financials on 2 dummies. A dummy for foreign versus domestic companies and another dummy serves as reputation measure (1 in case of listed in top reputation rankings, 0 otherwise). 

    However, now I want to control for year. Can I easily create dummy variables for each seperate year (so, DUM99, DUM00 ... DUM14) and include them all? And should I include both intercept and slope dummies? Or only interecept dummies?

    Soumitra K Mallick

    There are good ways of testing Time Series properties than by using dummies. please refer to my Papers on Asset Management & Quantitative Finance (Pareto Optimality modellings) on my RG page. There is so much that can be done by using standard Time Series techniques using SAS or SPSS. I hope that helps.

  • Soumitra K Mallick added an answer:
    How to apply PCA on futures commodity (oil) ?

    The data is from the futures market via Bloomberg, with the tickers CL1 to CL9 of the last price and volume. This is similar to Skiadopoulos (2008) .when you extract the data from Bloomberg; you get a column vector of price and volume for each group like CL1 etc. How do I perform PCA on the column vector (price with dim 2567 x 1)? The paper is attached below. Any advice is aprreciated.

    Soumitra K Mallick

    Dear Farah,

                          I have a suggestion which is to use an Econophysics model using the Quantum Mechanics approach. Try an equal weighting of all the stocks in CL1- CL9 say and compare the value of the mean of the returns by taking averages say. Then repeat this experiment with a different probability weightage and calculate the grand mean. Keep doing this till you find the best grand average return or at least locally best. The portfolio wights being orthogonal to the set of returns will give you the most efficient portfolio on oil stock futures. I am sure this will have additional efficiency properties. If you wish to you can take look at my papers on Pareto Optimality test on my RG page. SKM QC

  • Peter MacDough added an answer:
    How can I connect technical rules and efficient market hypothesis with the theory of behavioral finance?

    How can I connect technical rules eg moving averages (existed abnormal returns) and Efficient Market Hypothesis (weak form) with the theory of Behavioral Finance (any kind of behavioral issues which are relevant to the research of Technical Analysis)?

    Peter MacDough

    Have a look at the Adaptive Markets Hypothesis (Lo 2004) and how it is tested in different markets. Its an alternative to the EMH, where modern financial economics can coexist alongside behavioral models in an intellectually consistent manner.

    For example Todea (2009) investigates in his paper "Adaptive Markets Hypothesis: evidence from Asia-Pacific financial markets" the profitability of the moving average strategy on 6 Asian capital markets considering the episodic character of linear and/or nonlinear dependencies. The methodology applied there should be of help to you. 

    I hope this is of help to you!

  • Paul-Francois Muzindutsi added an answer:
    Which is the best model for Event Study Methodology?
    There are different models that are being used to estimate the stock returns under event study methodology such as; arbitrage pricing theory (APT), capital asset pricing model (CAPM), modified market model (MMM) and market model (MM).

    My question is which one is better between the market model and CAPM to estimate the return while studying dividend announcements? How will alpha and Beta be estimated under the market model and CAPM in the equation for event study methodology’ i.e Rit = αi + β (market return) + εit?
    Paul-Francois Muzindutsi

    In most studies, market model and the CAPM model seem to generate similar normal returns but the market model is mostly preferred because it does not impose any restrictions.  In your case, you may consider starting with your own preliminary analysis to test whether the normal returns from these two models differ before deciding on which model to use.  

    See this paper by  MacKinlay (1997)


  • Björn Stefánsson added an answer:
    Is there any case study in resource allocation with game theory ?

    there many empirical study on resource allocation with game theory .Is there any paper make a case study on resource allocation with game theory.

    Björn Stefánsson

    I refer to a case on energy resources among my contributions in the ResearchGate (linked) and to Chapter III.D.4 in Democracy with sequential choice and fund voting.

  • Patrick Navatte added an answer:
    What is the effect of the securitization transactions on credit risk in an emerging economy?

    There is no clear evidence regarding the effect of securitization transactions on the risk in the financial system. The literature about this subject is incipient for emerging economies and, in particular, for Latin American countries. A possible justification for this fact can be a lack of a developed financial system in these countries.

    Patrick Navatte


    if credit risk is transferred by selling (securitizing) a loan, the bank's incentive to credit-screen and monitor declines. Keys and al (2010) QJE find that securitized pools of subprime loans had default rates hat were 10% to 25% higher than similar mortgages  that were not securitized. Elul (2011) present additional evidence consistent with reduced screening of securitized mortgages.

    If investors in mortgage and asset-backed Securities recognize the loan-selling bank's suboptimal-screening, they should discount the value of securitizred loans, forcing the bank to internalize this inefficiency.

    In others words, a bank de cision to sell or retain a loan would weight the economic benefits of risk transfer against the economic costs of inefficient screening. (see Han and al (2015) Journal of finance.


  • Dávid Zibriczky added an answer:
    What do you think of the "health" of the Capital Asset Pricing Model?

    The CAPM is based on a robust theoretical framework, but empirically demonstrated weakness. The beta does not seem to be the only factor that can explain the risk-return relationship. Do you really think that the CAPM is dead?

    Dávid Zibriczky

    We have studied CAPM whether it's linearity holds in extreme conditions or not. We found that in come cases the nullhypothesis of CAPM linearity should be rejected. You can find more details here: https://www.researchgate.net/publication/227358232_Non-parametric_and_semi-parametric_asset_pricing

    We also studied the capability of capturing risk in one meausre and predicting future returns for securities. We compared one factor models, like standard deviation, CAPM beta, and additional two entropy based methods. Based on the results we found both advantages and disadvantages. CAPM beta is good for explaining returns in short term, but it less effective predict them for the next period because the value of CAPM beta for each securities is changing with a high variance over the time. More details here: https://www.researchgate.net/publication/270221149_Entropy-based_financial_asset_pricing

    Overally I think the theory is usable, however it has weaknesses. It can be a good basis for a more efficient multi-factored models, like Fama-French model (SMB-HML), Carhart model (SMB-HML-Moment) or additional factors like liquidity or entropy.

    • Source
      [Show abstract] [Hide abstract]
      ABSTRACT: We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the widely used risk and performance measures, the beta and the alpha, are biased and inconsistent. We deduce semi-parametric measures which are non-constant under extreme market conditions in a single factor setting; on the other hand, they are not significantly different from the linear estimates of the Fama-French three-factor model. If we extend the single factor model with the Fama-French factors, the simple linear model is able to explain the US stock returns correctly.
      Economic Modelling 03/2011; 28(3):1150-1162. DOI:10.1016/j.econmod.2010.12.008

    + 1 more attachment

  • Soumitra K Mallick added an answer:
    How are the benefits of asset management measured and tracked in your organisation?

    The ISO 55000 mentions several benefits of implementing asset management. How valid and practical are these benefits? In the IAM Academic Research Network Working Group on "Measuring the Benefits of Asset Management" we want to develop a framework/methodology to identify the critical success factors that ensure that the benefits to an organisation by implementing good asset management practices are achieved. To begin with we are interested in how various organisations have identified, quantified, and tracked “benefits” of asset management activities over time.

    Soumitra K Mallick

    Dear Rob,

                      In our organisation we put a departmentwise alphaneumeric code on every personal computer which are also terminals of the mainframe and keep digital records of the history and progression of each machine in a coded way which are periodically audited under systems auditing procodures by internal auditors as well as statutory government auditors. Replacements require written requests and are authorised by the Director and the Systems Head and is purely done on an exchange basis on requisition or once every two years. Operating Systems are licensed by the institute to the concerned user. Machines are not movable usually unless permitted for specific purposes and duration with a gatepass. Antivirus programs and certain library databases are provided by the institute free of charge on request by faculty. The WiFi system can be used by students on their personal laptops or they are allowed unlimited use of the three computer laboratories with about 150 pcs and terminals and the same data and antivirus libraries. It is a periodic audit based decentralised asset management system on unlimited workplace use basis. However, the website can be accessed round the clock 365 days-a-year on a remote professionally licensed host by authorised student and faculty account holders. There is a well built system of spam exclusions. Over about ten years use has reached a marginal growth steady state in hours of routed internet use. SKM PhD QC FEPS(D)

  • Soumitra K Mallick added an answer:
    How do I do Logit regression with time-series data?

    Hi! I want to use logit regression whit lags of the independent variables. Now, I was told I need to use time fixed effects for this (even though I don´t get why). Is this true, and if so, how do I do it? I can't both set the data to time-series and panel (tsset and xtset), but have to choose. Also, can I go around this problem by constructing the lagged independent variables ouside of Stata, in Excel, and then xtset the dataset? I'm a novice at both econometrics and at Stata, so please explain to me as if I was a child?

    Soumitra K Mallick

    Dear Prof. Nordfors,

                                       If your objective of doing Logit regression is to estimate the growth effects in the data then you can carry out both time series and time series analysis using panel data in an algorithmic (genetic) estimation procedure using the joint distribution of the error matrix using normal matrix inversion procedures. Please refer to my coauthored papers on mathematical statistical pricing and banking sector pricing on my RG page if you will. This will also have Econophysics procedures built in them and follow the Gauss Markov Theorem.SKM QC

  • Arian Razmi Farooji added an answer:
    How can I manage Product Portfolio for Engineer-to-Order industries?

    Working on a research topic, I am faced with this question " How can we propose a Product Portfolio Management framework for Engineer-to-Order industries?" Although, these industries have certain product families, they offer totally different products to their customers, based on what customers need. Sometimes they accept orders from customers, they design products and services just for them, but at the end they notice that the process was not as profitable as what they expected.
    So, how can these industries define their product portfolio in a way in which they still have demands and the whole design, manufacturing and delivery process remains profitable for them?
    Are there any related case-studies or articles in the literature? Thank you for your help and kind answers in advance.

    Arian Razmi Farooji

    Dr. Prasad, Thank you very much for your help and informative links

  • Dávid Zibriczky added an answer:
    Is anyone doing research on entropy and Stock market?

    Is anyone doing research on entropy and Stock market?

    It would be great to know if someone here is doing the same kind of research which will help in sharing ideas to each other.

    Dávid Zibriczky

    Hi Guys,

    I'm currently doing my PhD in Finance. One of my topics is the entropy-based risk estimation methods in stock market. Maybe this research can be interesting for you: https://www.researchgate.net/publication/270221149_Entropy-based_financial_asset_pricing

    Another interesting paper, an overview about the application of entropy in finance: http://www.mdpi.com/1099-4300/15/11/4909

    Best regrads

    • Source
      [Show abstract] [Hide abstract]
      ABSTRACT: We investigate entropy as a financial risk measure. Entropy explains the equity premium of securities and portfolios in a simpler way and, at the same time, with higher explanatory power than the beta parameter of the capital asset pricing model. For asset pricing we define the continuous entropy as an alternative measure of risk. Our results show that entropy decreases in the function of the number of securities involved in a portfolio in a similar way to the standard deviation, and that efficient portfolios are situated on a hyperbola in the expected return - entropy system. For empirical investigation we use daily returns of 150 randomly selected securities for a period of 27 years. Our regression results show that entropy has a higher explanatory power for the expected return than the capital asset pricing model beta. Furthermore we show the time varying behavior of the beta along with entropy.
      PLoS ONE 12/2014; 9(12):e115742. DOI:10.1371/journal.pone.0115742
  • Angel Marchev added an answer:
    What is the primary instrument to measure different fund( pension, hedge and mutual fund) performance?

    I want guidance or literature from anybody that can guide me to measurement items (questionnanires items) on measurement of pension/hedge/mutual fund or firm performance. The model I developed requires primary data and not secondary data for firm's of fund's performance. Thanks

    Angel Marchev

    (Not a full answer - just a reminder)
    I am sure you know this, but do not trust Sharpe Ratio (or any of the conceptually similar measures) as it is not a monotonous function for negative returns.

  • Ghazi Al-Assaf added an answer:
    If the time series data is stationary at a level, can we apply VAR?

    The data I have is stationary at level for both of the two variables. Can I apply VAR?

    Ghazi Al-Assaf

    Yes in this case you can use VAR. However, I suggest to check the stantionarity of your series using other unit root tests such as PP and KPSS. If you have the same results, you need to to estimate VAR then, you can also try the SVAR.

  • David M. Fields added an answer:
    Is the Fed interest rate as a measure of the liquidity crisis is not appropriate?

    I am using the fed rate as a proxy for Liquidity crises in US, however I had a comment that  the interest rates can be used for general monetary policy purposes. So, I have to provide evidence that the Fed interest rates are not used in us from 1954 to 2011  for general monetary policy purposes, then this quantity cannot be used as a measure of liquidity crisis. Is there any thing in the literature related to this issue. what is the best proxy for liquidity crisis ( credit crunch) ?

    David M. Fields

    Dear Mohammed, I am attaching my RIPE paper.

    • Source
      [Show abstract] [Hide abstract]
      ABSTRACT: This paper suggests that the dollar is not threatened as the hegemonic international currency, and that most analysts are incapable of understanding the resilience of the dollar, not only because they ignore the theories of monetary hegemonic stability or what, more recently, has been termed the geography of money; but also as a result of an incomplete understanding of what a monetary hegemon does. The hegemon is not required to maintain credible macroeconomic policies (i.e., fiscally contractionary policies to maintain the value of the currency), but rather to provide an asset free of the risk of default. It is argued that the current crisis in Europe illustrates why the euro is not a real contender for hegemony in the near future.
      Review of International Political Economy 05/2011; 20(4). DOI:10.2139/ssrn.1829329
  • Jyoti Kumari added an answer:
    In late nineties and early 2000 the vanishing dividends trend was prevailing, what is the trend today and why?

    Because trading in the U.S stock market is very active investors seeks speculative profits over dividend income

  • Shivbhakta Joshi added an answer:
    Can the coefficient of lagged debt variable be negative in capital structure model?

    The coefficient of lagged debt ratio has economic meaning in capital structure research that makes use of dynamic model specification. From the coefficient of the lagged debt variable, researchers usually calculate the speed of adjustment to the target debt (capital structure) level. But the coefficient of this lagged debt ratio is usually constrained between positive one and zero. Can the coefficient of lagged debt variable be negative in capital structure model? if yes, does it indicates negative adjustment to target debt (capital structure) level.

    Shivbhakta Joshi

    Yes it can be.

    refer to my article on quantcorpfin blog.

  • Fabrício Pitombo Leite added an answer:
    Are there any papers or books which examined historical change of the concept "hoarding"?

    I am wondering why the concept of hoarding has disappeared after Keynes's General Theory. Are there any economists who tried to extricate the concept of Hoarding after Keynes?

    The concept of Hoarding was once one of the most important ones. For example, it was an essential part of D. S. Robertson's framework of his monetary theory. However this concept does not play any conspicuous role in the economics after Keynes. It was practically wiped out from economics. As I have observed in my post of December 13, 2014 to my own question "Is saving necessarily invested or not? How can this contradiction in Keynes be solved?" (linked below), it seems that Keynes's Liquidity Preference concept has replaced and wiped out the concept of Hoarding.

    I am thinking to save the concept of Hoarding and coin it anew as an essential part of the monetary theory of productions. In that purpose, I want to know the conceptual history of the this notion.

    Fabrício Pitombo Leite

    From a perspective of History of Economic Thought, see Robinson, Joan (1938). The Concept of Hoarding

  • Sigit Pramono added an answer:
    Does transformation of microfinance institutions into regulated financial institutions increase accessibility of financing to the low income class?

    Most microfinance institutions were founded as non-profit organizations with main mission of providing financial services to the low income class or financially excluded people, mostly women. Although, it appears that transformation of microfinance institutions into regulated financial institutions comes with many benefits such as influx of new capital, deposit mobilization, increase outreach and improved management and governance among others. There is fear that transformed microfinance institutions may deviate from their original mission to serve the low income class and alleviate poverty. More specifically, some observers believe that the transformation of microfinance institutions into regulated financial institutions may encourage profit motive over social impact of alleviating poverty.

    Sigit Pramono

    Indeed, regulatory framework and adequate supervisory mechanism are needed to strengthening microfinance institutions. However, transformation of microfinance institutions into regulated financial institutions itself should be attached with affirmative action programs by the whole stakeholders to bring financial inclusion attained with enhancement financial access for the poor. In this sense, it is time to provide a comprehensive financial education, encourage community development  and empowerment, and government public policy alignment for the poor.

  • Duc Pham-Hi added an answer:
    If you had to solve a Hamilton-Jacobi-Bellman equation and you only have to give a quick and dirty (sub optimal) solution, how would you proceed ?

    Say, to optimize buy/sell controls from a portfolio with transaction costs over 180 periods 

    Theoretically, you use spectral decomposition, search for viscosity solutions ,
    discretize, etc then solve backwards ... but run into curse of dimension or it yields too difficult to interpret and unstable solutions anyhow. Some adaptive online sampling methods seem to work sufficiently well (Q-learning, TD learning, NDP, SMC etc.) . Has anyone used them ? Thanks

    Duc Pham-Hi

    Thanks Sergei, in fact I was thinking about that : a robot that learns to trade based on charts should work best if it had a way to decide when, to switch between forward (new learning) and backward (consolidation of old maps) optimization. Maybe a simple measure like, the new data, how far is it ( > X times standard deviations) ? if it's new go forward, if not, go backwards.      

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