Lecture Notes Financial Econometrics Professor - Pluto Huji Ac Il

567 Pages·2016·3.75 MB·English

Financial Econometrics
Lecture Notes
Prof. Doron Avramov
The Jerusalem School of Business Administration
The Hebrew University of Jerusalem
Introduction:
Why do we need a course in Financial
Econometrics?
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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics
Syllabus: Motivation
The past few decades have been characterized by an
extraordinary growth in the use of quantitative methods in the
analysis of various asset classes; be it equities, fixed income
securities, commodities, and derivatives.

In addition, financial economists have routinely been using
advanced mathematical, statistical, and econometric techniques
in a host of applications including investment decisions, risk
management, volatility modeling, interest rate modeling, and the
list goes on.
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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics
Syllabus: Objectives
 This course attempts to provide a fairly deep understanding of
such techniques.

The purpose is twofold, to provide research tools in financial
economics and comprehend investment designs employed by
practitioners.

The course is intended for advanced master and PhD level
students in finance and economics.
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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics
Syllabus: Prerequisite
 There is a pre-requirement course in Investments and Securities.

 I will assume prior exposure to matrix algebra, distribution theory,
Ordinary Least Squares, Maximum Likelihood Estimation, Method
of Moments, and the Delta Method.

 I will also assume you have some skills in computer programing
beyond Excel.
MATLAB and R are the most recommended for this course. OCTAVE could
be used as well, as it is a free software, and is practically identical to
MATLAB when considering the scope of the course.
If you desire to use STATA, SAS, or other comparable tools, please consult
with the TA.

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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics
Syllabus: Grade Components
Assignments (36%): there will be two problem sets during the
term. You can form study groups to prepare the assignments -
up to four students per group. The assignments aim to
implement key concepts studied in class.

Class Participation (14%) - Attending AT LEAST 80% of the
sessions is mandatory. Otherwise, you will not get credit for
this course. In addition, 4 points will be reduced for any
missing session without proper documentation.

Take-home final exam (50%): based on class material,
handouts, assignments, and readings.
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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics
Syllabus: Topics to be Covered - #1
Overview:
Matrix algebra
Regression analysis
Law of iterated expectations
Variance decomposition
Taylor approximation
Distribution theory
Hypothesis testing
OLS
MLE
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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics
Syllabus: Topics to be Covered - #2
Time-series tests of asset pricing models
The mathematics of the mean-variance frontier
Estimating expected asset returns
Estimating the covariance matrix of asset returns
Forming mean variance efficient portfolio, the Global
Minimum Volatility Portfolio, and the minimum Tracking
Error Volatility Portfolio.
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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics
Syllabus: Topics to be Covered - #3
The Sharpe ratio: estimation and distribution

The Delta method

The Black-Litterman approach for estimating expected
returns.

Principal component analysis.
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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics
Syllabus: Topics to be Covered - #4
Risk management and downside risk measures:
value at risk, shortfall probability, expected shortfall (also
known as C-VaR), target semi-variance, downside beta, and
drawdown.

Option pricing: testing the validity of the B&S formula

Model verification based on failure rates
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Prof. Doron Avramov, The Jerusalem School of Business Administration, The Hebrew University of Jerusalem, Financial Econometrics