# Quantitative Finance

3
Is a REE fully revealing if the price is a an invertible function of the weighted-average signal?

In my working paper, I have agents with a basic information structure:

s = w + e

s is the signal, w is the fundamental value (that we want to guess) and e a normal error.

All agents in the same group have the same signal and the same risk aversions.

Danthine (1978) says that if agent display different risk aversion or different information, there is not sufficient statistic for the fundamental value. Indeed, the price is an invertible function of the weighted-average signal.

However, can we say that the weighted-average is linear sufficient and therefore, the equilibrium is fully-revealing?

Dear Mr. Borocco,

I would like to bring to your kind notice my published paper on Implementing Pareto Optimal Asset Prices which has been published in Quantitative Finance as an Archived Paper and which is listed on my RG page which may give you some clues as to your problem of computing REE using sufficient statistics. You may get some help out of it. Thanks for drawing my attention to your problem, good luck. Earl Prof. (Sir Ashutosh Mukherjee University Institute Chair) Dr. (D.Phil.) SKM QC EPS Fellow (Indirect) MES MRES MAICTE

4
What methods beyond historical data can be used to simulate parameters (e.g. volatility of commodity prices) financial Monte Carlo simulation?

I am working on Monte Carlo analyses to support financial decision making on a corporate level (no financial market data). A good example is the valuation of a coal power plant. This can be done with many different methods, Monte Carlo being one of them. I assume that many factors that determine the NPV of the plant are volatile (e.g. electricity prices, coal prices and many more). Now I would like to calculate a large number of scenarios of how these volatile input parameters could behave and calculate the NPV for each scenario to better understand my risks. My question is: what methods do you use or are familiar with to determine the distribution of these parameters (and the joint PD of correlated parameters)?

There are many simple ways to do this that I know are used in practice like using historic volatility (thus assuming no change in the volatility) or trusting some expert with the estimation of the input. Yet I find very little material that approaches this topic from a more analytic perspective. I would be very grateful for any comments and especially suggestions for in-depth reading on the topic. Thanks a lot!

Towards the answer provided by Mr. Sergio Zuniga-Jara: I was not aware of this literature and will definitely go through it as it relates quite closely with my research interests. I understand the importance of the cost of capital in this context and the role it can take in accounting for risk in any valuation with uncertainty. Yet the advantages I perceive of modelling expected cashflows explicitly still hold once I adjust the cost of capital in the suggested ways. For example I am interested in creating confidence intervals around valuation estimates, this I believe is only possible with explicit cash flow modelling.

Towards the answer provided by Mr. Peter Monkhouse: I fully agree with you that the questions emerging from the proposed analysis will bring me very quickly into real option applications and this is indeed another of my research interests. Monte Carlo simulation is also one of the ways to compute option values and the questions of how I build bottom-up estimates for expected cash flows in a Monte Carlo real option setting still need to be addressed. As you point out the level of interconnectedness is usually quite high and has a high impact on questions of valuation. In fact there is a literature comparing Value-at-risk value "with correlation" and "without correlation", the stark difference in VaRs point to the importance of explicit measurement of correlations between stochastic variables that affect expected cash flows.

7
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.

https://www.researchgate.net/publication/286256177_Global_Financial_Crisis_Exploring_the_Special_Role_of_US_Banks_and_Regulations

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##### Article: Global Financial Crisis: Exploring the Special Role of U.S. Banks and Regulations
[Hide abstract]
ABSTRACT: Financial markets have suffered the greatest dislocation following the truly seismic significance of the global financial crisis. Regulators argue that the banking sector played a particularly special role in triggering the causes of the subprime debacle, thereby leading to the occurrence of the global financial crisis. Banks previously functioned as only a financial intermediary, but certain developments in the international banking sector like deregulation, technological progress, consolidation and competition, secularization and financial innovation, resulted in banks being involved in subprime lending activities and hence, a reason behind the financial turmoil. The aim of this paper is to scrutinize the special role of banks in the global financial crisis and to stress on the need for increased regulation and their implications on the banking sector. The current study will thus contribute to the examination of the salient features of the global financial crisis and provide regulatory suggestions for the banking sector and the government as a whole.
Full-text · Article · Mar 2016
3
Under which conditions a perfect hedge can be achieved in a market characterized by random jumps and stochastic volatility?

We know in the literature that in a market extended to contain swap contracts whose payoffs depend on the realized higher moments of the state variable process, a perfect hedge can be achieved. Are there any other conditions that lead to a perfect hedge in a market characterized by random jumps and stochastic volatility?

Dear Prof. Doffou,

If you are willing to go even more into technical and technological details then I would like to draw your attention to my published research on the String Theory of Stock Market systems listed on my RG page and you will see that under discontinuos stochastic volatility of the environment from which the fundamentals of asset pricing and management and engineering potentials are drawn some additional physical structural engineering is required to the stock market system which includes laws on no arbitrage, short and medium range planning and managerial coordination of individual plans so as to engineer a econophysically consistent asset pricing system. But once that has been constructed as i have shown with experiments over various levels of aggregation that the system can achieve rational expectations Arrow-Debreu equilibrium in genetic meanfield systems. The system can be shown to be conserving Matter and Energy fairly efficiently in a dynamic equilibrium sense. It is efficient in all senses. Earl Prof. (University Institute Chair) Dr. (D. Phil.) SKM QC EPS Fellow (Indirect) MES MRES MAICTE

10
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?

hi , Dear , According to me market model would be best . For any event studies , may be M&A or Dividend announcement  or any corporate announcement impact in stock returns or market reaction could be studied by CAR model or BHAR( By the shareholders abnormal return ) model can be applied.

3
How do I apply a break point test for the indican stock market?

I need to devide my period of study into Pre and post Circuit breaker (CB) in Indian Stock Market. So far market wide circuit breakers have been applied 6 times. The dates are given below. Is it neseaary to apply any break point test. Because the dates of CB is known. so I can devide the period based on these dates. Still I am not satisfied. Can you suggest me what is the solution in this case?

Dates of Circuit Breaker
May 17 2004
May 22 2006
October 17 2007
January 22 20008
May 18 2009
October 05 2012

Dear Prof. Panda,

It is a interseting question you have asked, some events I have done research on since my Doctoral Thesis at NYU in 1993, and especially since this model has been adapted a number of times in answering questions on Quantitative Finance & Kinematics. If you wish to you can take a look at my paper on Markov Processes and Expected Utility analysis or Haag's Theorem paper on my Research Gate website. I believe these models are being used worldwide for fundamental research in Quantum Physics as well as Quantum Econophysics and Quantiative Finance. It develops on a model of Radner & Rothschild published in JET in 1975. The idea is that Circuit Breakers in Stock Markets to control extreme fluctuations due to behavioral factors of markets are necessary in principle for Financial Engineering to give sustainable solutions but that by itself does not gurantee that markets will reach equilibrium on a sustained basis as you need energy and participation by investors to run financial exchanges. Energy requirements make Stock Markets go topsy turvy sometimes and so does negative investor participation and it is difficult to say whether  circuit breakers in stock markets can aggravate these factors which are both physical as well as economical being based on incentives. So without answering your specific question I would say that you cannot really treat circuit breaker events in the same manner as we treat structural breaks in any econometrics modelling involving policy. Earl Prof. Dr. SKM QC EPS Fellow (Indirect) MRES MES MAICTE

3
Any advice for a "standard" data set for commodity spread options valuation ?

I am looking for a data set to test a local volatility algorithm pricer for spread or crack options on commodity (WTI). I would need

- Future data quote markets

- Options data (call / put) quote markets considered on spread option maturity

- Ideally : spread or crack quote markets,

- Ideally : corresponding Kirk / Bjerksund or Monte Carlo reference prices.

To your knowledge, is there any standard already considered data set to test performance and precision of the method ?

Thanks for any contribution !

I could indeed build my own theoretical data set, having a look to real data, for instance CBOE : in particular, CME exhibits WTI call / put / futures, as well as spread options quotes to test against.

However, I am surprised not to have found such a data set in the academic litterature, as well as basic results to start a first analysis. This work surely already exists.

I will try start building my own and publish it. However, this is a message in a bottle : to any kind reader aware of such a data set, do not hesitate to point me out a link  !

3
Where can I find research on the duration and amplitude of various historical cycles for stock market sectors and indices?

Duration of intermediate and long term cycles from trough to peak average duration and return numbers

Dear Tom Udelson

Please show the attached file ,

Best Regards

7
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.

I have a question which is are you planning on using the results of your unit-root test to test for the structural break test or somehow making adjustments to the model before you do the latter test? If not then you should use the structural break test in the data which is model independant as long as you are using parametric estimation procedures and then test for the unit root using your model. If both are cleared then you should expect a high R-squares I guess, I don't know. SKM QC PhD EPS Fellow (Indirect)MES MRES MAICTE

12
Who are the top researchers in Behavioral finance?
Who are they, what are they researching and what are the universities leading the topics?

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)

6
How do I calculate asset allocation policy of a mutual fund asset allocation?

Must I take the unquoted shares also?

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)

2
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

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

https://en.wikipedia.org/wiki/Financial_accelerator

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

6
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

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

11
Can anyone recommend good papers on market making and finance?

Hello,

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!

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

3
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?

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

8
How do you measure money and liquidity in a financial market?

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

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

4
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!

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).

5
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?

Thank you very much have found this helpfull

4
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?

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.

4
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.

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

8
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)?

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!

5
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.

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.

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##### Article: Master plan for energy resources renovated
[Hide abstract]
ABSTRACT: An experiment of the making of a master plan for energy resources by fund voting described. A discussion of the making of a governmental master plan for energy resources and how it could be renewed in fund voting.
Full-text · Article · Jul 2013
22
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?

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.

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##### Article: Non-parametric and semi-parametric asset pricing
[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.
Full-text · Article · Mar 2011 · Economic Modelling

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6
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.

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)

9
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?

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

5
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.

4
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.

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

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##### Article: Entropy-Based Financial Asset Pricing
[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.
Full-text · Article · Dec 2014 · PLoS ONE
3
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

(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.

7
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?

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.

4
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) ?

Dear Mohammed, I am attaching my RIPE paper.

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##### Article: Hegemonic Currencies During the Crisis: The Dollar Versus the Euro in a Cartalist Perspective
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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.
Full-text · Article · May 2011 · Review of International Political Economy