UNSW-FINS3640-S2,2010-Week 4


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UNSW-FINS3640-S2,2010-Week 4

  1. 1. School of Banking and Finance www.banking.unsw.edu.au<br />
  2. 2. FINS3640 - Investment Management Modeling<br />Week 4 - 11 Aug 2010<br />Introduction to using Stata <br />for Financial Modeling<br />
  3. 3. Revision<br />Stata commands<br />Regression and t-test interpretation<br />R2<br />P-value<br />Hypothesis testing<br />Null hypothesis H0<br />Conditional testing<br />Binary<br />Visual plot analysis<br />Price observation, holding period return, dividend and stock split adjustments<br />WRDS<br />
  4. 4. Multivariate Models<br />
  5. 5.
  6. 6. Capital Asset Pricing Model<br />Market Premium<br />
  7. 7.
  8. 8. Fama-French Three-Factor Model<br />Size Premium<br />Value Premium<br />
  9. 9.
  10. 10. Four-Factor Model<br />Momentum<br />Momentum-Driven <br />Portfolio Rebalancing<br />
  11. 11.
  12. 12. Five-Factor Model<br />Asset Growth<br />
  13. 13.
  14. 14.
  15. 15. Generic Multivariate Model<br />This is what you need to build<br />
  16. 16. How? Some hints:<br />Read contemporary research (see suggested reading list)<br />Retrieve & process data (in-class demonstration)<br />Establish hypotheses (should be from a quantitative course)<br />Test the hypotheses<br />Correlation<br />R2 & adjusted R2<br />P-value<br />t-value<br />Other econometrics indicators (chi2, autocorrelation…)<br />Build and optimise the model(s)<br />
  17. 17.
  18. 18. Modeling<br />
  19. 19. Data Management<br />Wharton WRDS<br />French Data<br />Stock selection<br />Monthly<br />5-30 years<br />
  20. 20. Weighting<br />
  21. 21. Risk-free Rate<br />CAPM assumption: single risk-free rate<br />Is this practically true?<br />
  22. 22.
  23. 23. Statistical Testing<br />Multivariate regression<br />t-test<br />Visual analysis<br />
  24. 24. Multicollinearity<br />Variables are almost linearly dependent<br />Large standard errors lead to insignificant t-values<br />Little explanatory power<br />Test Collinearity<br />Correlation matrix<br />Rotation of variables: R2 does not change much when one variable is dropped<br />Remedy<br />Drop collinear variable(s)<br />
  25. 25. Outliers & Influential Points<br />Extreme values<br />Market crashes e.g. October 1987, PG 2010<br />Market capitalisation of top firms from highly concentrated indices e.g. BHP from ASX<br />Skews the model<br />'Black swans'<br />Identify: unusual observations on visual display<br />Remedies<br />Time series method: log normal<br />Exclusion of influential points<br />
  26. 26.
  27. 27. Andersen T G, Bollerslev T, Diebold F X, Wu G, 2006, 'Realized Beta: Persistence and Predictability', Econometric Analysis of Financial and Economic Time Series, Advances in Econometrics, Volume 20, 1-39, Elsevier, 2006<br />
  28. 28. Binary Variables<br />Grouping<br />by<br />
  29. 29. Heteroskedasticity<br />White 1980<br />Run regression<br />reg y x<br />The Het test right after running regression<br />hettest<br />Save the residual<br />predict res, r<br />Plot the residuals<br />plot res x<br />Bibliograph<br />http://www.polsci.wvu.edu/duval/ps602/Notes/STATA/heteroskedasticity.htm<br />http://web.missouri.edu/~kolenikovs/stata/Duke/class3.html<br />http://www.stata.com/support/faqs/stat/panel.html<br />
  30. 30. Autocorrelation<br />Autocorrelation<br />ac<br />Partial autocorrelation<br />pac<br />Q-statistics<br />Correlogram<br />corrgram<br />
  31. 31.
  32. 32.
  33. 33. ARIMA<br />Autoregressive integrated moving average<br />arima<br />predict<br />
  34. 34. Reading<br />
  35. 35. Reading (1)<br />Required Reading<br />Reeves J. J. 2008<br />Recommended Reading<br />Multivariate Models<br />Louise Swift, Sally Piff, Quantitative Methods for Business, Management and Finance, 2nd edition<br />John Y. Campbell, Yeung Lewis Chan, Luis M. Viceira, 2001, 'A multivariate model of strategic asset allocation'<br />Alvin C. Rencher, 2002, Methods of multivariate analysis<br />
  36. 36. Reading (2)<br />Fama French<br />Fama, Eugene F.; French, Kenneth R. (1993). "Common Risk Factors in the Returns on Stocks and Bonds". Journal of Financial Economics 33 (1): 3–56<br />Fama, Eugene F.; French, Kenneth R. (1992). "The Cross-Section of Expected Stock Returns". Journal of Finance 47 (2): 427–465<br />
  37. 37. Reading (3)<br />Momentum<br />Barberis, N., A. Shleifer, and R. Vishny. “A Model of Investor Sentiment.” Journal of Financial Economics, 49, 1998.<br />Crombez, J. "Momentum, Rational Agents and Efficient Markets." The Journal of Psychology and Financial Markets, 2, 2001.<br />Daniel, K., D. Hirschleifer, and A. Subrahmanyam. “A Theory of Overconfidence, Self-Attribution, and Security Market Under and Over-reactions.” Journal of Finance, 53, 1998.<br />Jegadeesh, N., and S. Titman. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48, 1993.<br />Jegadeesh, N., and S. Titman. “Profitability of Momentum Strategies: An Evaluation of Alternative Explanations.” NBER Working paper #7159, 1999.<br />
  38. 38. Reading (4)<br />Asset Growth<br />Cooper, Gulen & Schill, 2009, 'The asset growth effect in stock returns'<br />Business Cycle<br />DeStefano, Michael, 'Stock Returns and the Business Cycle'. Financial Review, Vol. 39, No. 4, November 2004<br />Corporate Governance<br />Shane A. Johnson, Ted Moorman, and Sorin Sorescu, 2005, 'Governance, Stock Returns, and Market Efficiency'<br />
  39. 39. Reference<br />Reeves J. J. 2008<br />Andersen et al 2006<br />Heng et al 2010<br />http://www.polsci.wvu.edu/duval/ps791c/Notes/Stata/arimaident.html<br />