Financial Economics and Econometrics (Routledge Advanced Texts in Economics and Finance)

Cover
Half Title
Series
Title
Copyright
Dedication
Contents
List of figures
List of tables
List of boxes
Preface
Acknowledgments
Part I Characteristics of financial data and univariate models
	1 Introduction to financial economics and econometrics
		1 What is financial economics?
		2 What is financial econometrics?
		3 What are quantitative finance and financial engineering?
		4 Financial economics and econometrics and other disciplines
		5 Plan of the book
	2 How to write a research paper
		Introduction
		1 Finding a topic
		2 Literature review
		3 Methodology
		4 Data
		5 Empirical analysis and discussion
		6 Summary and conclusions
		7 Finance journals and data sources
		8 Putting it all together
	3 The characteristics of financial series
		Introduction
		1 Macro vs. financial data
		2 Distributional properties of financial series
			2.1 Raw vs. transformed series
			2.2 Descriptive statistics
			2.3 Graphical illustrations
			2.4 Some empirical evidence
		3 Stylized facts of financial series
			3.1 Linear dependencies
			3.2 Nonstationarity
			3.3 Calendar effects
			3.4 Long memory
			3.5 Nonlinearities
			3.6 Chaos
			3.7 Other characteristics
				3.7.1 Scaling
				3.7.2 Volume
				3.7.3 Extreme values
		Key takeaways
		Test your knowledge
		Test your intuition
	4 Univariate properties of financial time series
		1 Introduction
		2 Nonstationarity
			2.1 Nonstationary models
		3 Stationarity and processes
			3.1 Making a series stationary
				Differencing
				Curve fitting
			3.2 Autoregressive model
				3.2.1 Autocorrelation function
				3.2.2 Partial autocorrelation function
		3.3 Moving average model
		3.4 ARMA model
			3.4.1 Causality in ARMA(p,q)
		3.5 Building AR, MA and AR(I)MA models
		3.6 The Box–Jenkins approach
			3.6.1 Model identification
				Graphical approach
			3.6.2 Econometric approach
			3.6.3 Model estimation
			3.6.4 Model validation
			3.6.5 Forecasting
			3.6.6 Some comments on ARMA specifications
				An example
			3.6.7 Overview of modeling and forecasting time series
		4 Some empirical evidence
		Key takeaways
		Test your knowledge
		Test your intuition
	5 Short­ and long-run relationships among time series
		1 Introduction
		2 Short­term relationships
			2.1 Covariance and correlation
			2.2 Causality
				2.2.1 Granger causality
				2.2.2 Application
				2.2.3 Early evidence on causality among stock prices and macro variables
		3 Unit roots
			3.1 Motivation
			3.2 Dickey–Fuller unit root tests
			3.3 Phillips­Perron unit root test
			3.4 Kwiatkowski, Phillips, Schmidt and Shin unit root test
			3.5 Ng and Perron unit root test
			3.6 On the inclusions of a constant and/or a trend
			3.7 An example
			3.8 Unit root testing under structural breaks
				3.8.1 Some issues
				3.8.2 Some examples
			3.9 Empirical evidence
		4 Cointegration
			4.1 Motivation
			4.2 Cointegration tests
				4.2.1 The Engle and Granger cointegration approach
				4.2.2 Some examples of cointegration and economic equilibrium
					Stock prices and dividends
					Purchasing power parity
					Consumption, income and wealth
					Money demand
					Relationships among interest rates
				4.2.3 The residuals­based cointegration approach
				4.2.3 The Phillips–Ouliaris cointegration test
				4.2.4 The Durbin–Watson cointegrating statistic test
				4.2.5 Autoregressive distributed lag (ADL) model
					An example
				4.2.6 The Johansen approach
				4.2.7 Rolling­sample cointegration
				4.2.8 A trivariate VECM
				4.2.9 An example
				4.2.10 Advances in cointegration
		5 Cross (auto)correlations
			5.1 Definition
			5.2 Motivation
			5.3 Implementation and interpretation
				5.3.1 An example
			5.4 Some empirical evidence
		Key takeaways
		Test your knowledge
		Test your intuition
Part II Asset returns
	6 The efficient market hypothesis and tests
		Introduction
		1 The efficient market hypothesis (EMH)
			1.1 Preliminaries
			1.2 Forms of market efficiency
			1.3 Tests of market efficiency
				1.3.1 Nonparametric tests
					Run(s) test
					Unit root tests
				1.3.2 Parametric tests
					Variance ratio tests
					Serial correlation tests
		2 Other tests of market efficiency
			2.1 Preliminaries
			2.2 Event study methodology
				2.2.1 Abnormal returns
					Cumulative abnormal returns
					Buy-and-hold abnormal returns
					Jensen’s alpha
				2.2.2 Complications
					On computing expected and normal returns
					On setting the statistical hypotheses
					Other potential issues
				2.2.3 Event study design
		3 Other models for testing the EMH
			3.1 Univariate models
			3.2 Multivariate models
			3.3 Other models
		4 Selected empirical evidence
			4.1 Short­term patterns in stock returns
			4.2 Long­term patterns in stock returns
			4.3 Market anomalies
		5 Where do we stand now on EMH?
		Key takeaways
		Test your knowledge
		Test your intuition
	7 The capital asset pricing model and its variants
		Introduction
		1 Theoretical motivation
			1.1 Risk aversion, portfolio risk and diversification
			1.2 Mean­variance model in brief
			1.3 Assumptions of CAPM
			1.4 Derivation of CAPM
			1.5 The security market line
			1.6 The zero­beta model
			1.7 Some issues with CAPM
		2 Econometric methodologies
			2.1 The simple linear regression model
			2.2 CAPM specifications
				2.2.1 Time­series specifications
					The Single Factor Model
				2.2.2 Cross­section regression specifications
					The Black, Jensen and Scholes approach
					The Fama–MacBeth methodology
					M-CAPM vs. B-CAPM vs. SL-CAP
					The Fama–French methodologies
				2.2.3 The generalized method of moments approach
			2.3 Empirical evidence on CAPM
				2.3.1 Roll’s critique
		3 Some extensions/variants of CAPM
			3.1 Merton’s intertemporal CAPM
			3.2 The consumption CAPM
			3.3 The X­CAPM
			3.4 The liquidity CAPM
			3.5 The international CAPM
			3.6 The H­CAPM
		4 The equity premium puzzle
			4.1 The problem
			4.2 Explaining the puzzle
		Key takeaways
		Test your knowledge
		Test your intuition
	8 Multifactor models and the Arbitrage Pricing Theory
		Introduction
		1 Categories of factor models
			1.1 Macroeconomic factor models
			1.2 Fundamental factor models
			1.3 Statistical factor models
		2 Factor­construction methodologies
			2.1 Autoregressive process
			2.2 Moving average process
			2.3 ARMA process
			2.4 Time­series regression methodology
			2.5 Cross­section regression methodology
			2.6 Factor and principal components analyses
				2.6.1 Factor analysis
				2.5.2 Principal component analysis
		3 Determining the number of factors
			3.1 Some empirical evidence
		4 The Arbitrage Pricing Theory
			4.1 Assumptions
			4.2 Differences between APT and CAPM
			4.3 The specification
			4.4 Factor sensitivities
			4.5 What are the common or systematic factors?
			4.6 Empirical tests and applications of APT
			4.7 Empirical analyses of APT
				Time­series regressions
			4.8 International APT
			4.9 Some notable APT applications
				Chen, Roll and Ross
				Chan, Chen and Hsieh
				Some comments on the CRR and CCH papers
				Flannery and Protopapadakis
		5 Important multifactor models
			5.1 The Fama and French three­factor model
			5.2 The expanded FF three­factor model
			5.3 The FF five­factor model
			5.4 The Carhart four­factor model
		6 Other multifactor models
			6.1 The Pástor­Stambaugh model
			6.2 The Burmeister, Roll and Ross model
			6.3 The Fung­Hsieh factor models
			6.4 The Hou, Xue and Zhang q­factor model
		7 Some econometric issues and methodologies
			7.1 Heteroscedasticity
				7.1.1 The White test
				7.1.2 The Goldfeld–Quandt test
				7.1.3 The generalized least squares approach
			7.2 Serial correlation
				7.2.1 The Cochrane–Orcutt approach
			7.3 Quantile regression
			7.4 Rolling regression
		8 Some final comments on multifactor models
		Key takeaways
		Test your knowledge
		Test your intuition
Part III Interest rates, yields and spreads
	9 The risks and the term structure of interest rates
		Introduction
		1 Interest­rate determination
			1.1 The loanable funds theory
			1.2 The liquidity preference theory
		2 US Treasury bills and inflation
		3 Money and capital market rates
			3.1 Money market rates
			3.2 Capital market rates
		4 The risk structure of interest rates
		5 The term structure of interest rates
			5.1 The yield curve
				5.1.1 Spot and forward rates
				5.1.2 Slopes of the yield curve
			5.2 Swap rate yield curve
			5.3 Theories of the term structure of interest rates
				5.3.1 The expectations theory
				5.3.2 The liquidity preference theory
				5.3.3 The preferred habitat theory
				5.3.4 The market segmentation theory
			5.4 Practical importance of the yield curve
		6 Some empirical evidence on the term structure
		7 Interest rate models
			7.1 Some basic concepts
			7.2 Single­factor, short interest rate models
				7.2.1 The Vasicek (1977) models
				7.2.2 The Rendleman–Bartter (1980) model
				7.2.3 The Hull and White (1987, 1990) model
				7.2.4 The Cox–Ingersoll–Ross (1985) model
				7.2.5 The Ho and Lee (1986) model
				7.2.6 The Dothan (1978) model
				7.2.7 The Black–Derman–Toy (1990) model
				7.2.8 The Black and Karasinski (1991) model
				7.2.9 The Heath et al. (1992) model
				7.2.10 The Kalotay–Williams–Fabozzi (1993) model
				7.2.11 The Squared Gaussian Model
			7.3 Evaluation of one­factor, short rate models
			7.4 Multifactor interest rate models
				7.4.1 The Brennan and Schwartz (1979) model
				7.4.2 The Richard (1978) model
				7.4.3 The Longstaff and Schwartz (1992) model
				7.4.4 The Chen (1996a,b) model
			7.5 The LIBOR market-­rate model
		8 Some empirical evidence
		Key takeaways
		Test your knowledge
		Test your intuition
	10 Yields, spreads and exchange rates
		Introduction
		1 Bond yields and spreads
			1.1 Bond prices and yields
			1.2 Bond yield spreads
			1.3 Some spreads and their meaning
		2 The economic significance of yield spreads
			2.1 Yield spreads and economic magnitudes
			2.2 Spreads and risk components
		3 Econometric modeling
			3.1 Logit model
			3.2 Probit model
				3.2.1 Interpretation and application
			3.3 Multinomial models
			3.4 Cointegration among spreads
		4 Exchange rates
			4.1 Some important laws
				4.1.1 The law of one price
				4.1.2 The theory of purchasing power parity
				4.1.3 Demand and supply analysis
				4.1.4 The interest rate parity theorem
				4.1.5 The covered interest rate parity
				4.1.6 The uncovered interest rate parity
				4.1.7 The forward rate unbiasedness condition
				4.1.8 The real interest rate parity
			4.2 Some empirical evidence
			4.3 The forward premium puzzle
		5 Some econometric methodologies
			5.1 Simultaneous equations
			5.2 The indirect least squares method
				5.2.1 The identification issue
			5.3 The 2­stage least squares approach
			5.4 The instrumental variables approach
			5.5 VAR/VEC models
				An illustration
		Key takeaways
		Test your knowledge
		Test your intuition
Part IV Volatility and correlation
	11 Volatility modeling and forecasting
		1 Introduction
		2 Volatility and returns
			2.1 Empirical regularities of volatility
			2.2 Sources of volatility and stock returns
			2.3 Implied vs. realized volatility
		3 Volatility models
			3.1 ARCH model
			3.2 GARCH model
				An illustration of ARCH and GARCH models
			3.3 (G)ARCH­M
			3.4 Exponential GARCH
			3.5 The Glosten et al. (1993) model
			3.6 Threshold (G)ARCH
			3.7 Asymmetric Power ARCH
			3.8 Other GARCH­type models
				Some illustrations using the aforementioned models
			3.9 Tests for asymmetries
			3.10 News impact curves
			3.11 Model building
		4 Forecasting volatility
			4.1 Exponential smoothing
			4.2 Exponentially weighted moving average
			4.3 GARCH­type models
			4.4 Some empirical evidence
		5 Other variants of GARCH models
		6 Stochastic volatility
		7 Realized variance
		8 Volatility as an asset class
		Key takeaways
		Test your knowledge
		Test your intuition
	12 Correlation modeling
		1 Introduction
		2 Covariance and correlation
			2.1 Covariances and correlations
				A portfolio example
				An example of CAPM beta
				A hedge ratio example
			2.2 Some general discussion on correlation and covariance
			2.3 Simple covariance models
				2.3.1 Implied covariance and correlation model
				2.3.2 Exponentially weighted moving average covariance model
				2.3.3 GARCH­covariance model
			2.4 Contagion and interdependence (spillovers)
				2.4.1 Theories of contagion and spillovers
				2.4.2 A simple model to measure contagion and spillovers
		3 Multivariate GARCH models
			3.1 VECH models
			3.2 The BEKK model
			3.3 Factor GARCH models
			3.4 The constant conditional correlation GARCH model
			3.5 The dynamic conditional-­correlation GARCH model
			3.6 Dynamic equicorrelation model
			3.7 Asymmetric MGARCH
			3.8 The copula­MGARCH model
				Applications of some MGARCH models
		4 Regime­switching models
			4.1 Markov­switching models
			4.2 Markov­switching (G)ARCH models
			4.3 Some financial applications
		Key takeaways
		Test your knowledge
		Test your intuition
Part V Topics in financial management
	13 Capital structure and dividend decisions
		1 Introduction
		2 Theories of capital structure
			2.1 The trade­off theory
				2.1.1 Costs of bankruptcy
			2.2 The pecking order theory
			2.3 The free­cash flow theory
			2.4 Other theories of capital structure
		3 Methodologies used in capital structure
			3.1 Linear, multiple discriminant analysis
				3.1.1 Altman’s Z­score models
			3.2 Categorical­variable models
				3.2.1 Censored and truncated variables
			3.3 Panel analysis
				3.3.1 The fixed­effects model
				3.3.2 The random­effects model
			3.4 Econometric issues
		4 Empirical evidence on capital structure and additional insights
			4.1 Empirical evidence on capital structure theories
			4.2 Additional research on capital structure
		5 Dividend policies and theories
			5.1 The Modigliani and Miller dividend irrelevance proposition
			5.2 The information content of dividends
				5.2.1 The signaling theory
			5.3 The clientele effect theory
			5.4 The tax effect theory
			5.5 The transactions cost­induced effect
			5.6 The bird­in-the­hand theory
			5.7 The agency cost or the free­cash flow hypothesis
			5.8 The residual dividend theory
			5.9 The firm life­cycle theory of dividend payout
			5.10 The dividend­smoothing theory
		6 Empirical evidence on dividend theories
			6.1 Empirical tests of dividend theories
			6.2 Other tests of dividend policies literature
			6.3 A brief recap of dividend theories and empirical evidence
		Key takeaways
		Test your knowledge
		Test your intuition
	14 Mergers, acquisitions and corporate restructurings
		1 Introduction
		2 Mergers, acquisitions and restructurings
			2.1 Motives for mergers
				2.1.1 Economies of scale, scope and integration
				2.1.2 Achieving efficiencies
				2.1.3 Tax advantages
				2.1.4 Other motives
			2.2 Acquisitions
				2.2.1 Gains from an acquisition
			2.3 Corporate restructuring
				2.3.1 Reasons for corporate restructuring
					Divestitures
					Spin-offs
					Equity carve-outs
					Split-offs
					Liquidation
					Privatization
				2.3.2 The distressed exchange restructuring theory
		3 Econometric methodologies in M&A investigations
			3.1 Conditional logit
			3.2 Survival analysis
		4 Empirical evidence on mergers and acquisitions
			4.1 Announcement event studies
			4.2 Pre­ and post­merger firm performance
			4.3 Impact of a merger or acquisition on financial performance
			4.4 Market valuation and merger activity
			4.5 Selected international evidence on mergers and acquisitions
		5 Studies using conditional logit, tobit and survival analysis
			5.1 Studies having used the conditional logit
			5.2 Studies having used the Tobit model
			5.3 Studies having used survival analysis
		6 Empirical evidence on corporate restructuring
		Key takeaways
		Test your knowledge
		Test Your intuition
	15 Contemporary topics in financial economics
		1 Introduction
		2 Market microstructure
			2.1 Price discovery and formation
			2.2 Market structure and design
			2.3 Market transparency
			2.4 Trader anonymity
			2.5 High­frequency trading
				2.5.1 Traditional market­making vs. HFT market-making
				2.5.2 HFT strategies
		3 Empirical evidence on market microstructure and high­frequency trading
			3.1 Selected research on market microstructure
			3.2 Selected empirical evidence on high­frequency trading
		4 Econometric methodologies
			4.1 The state­space model
			4.2 The autoregressive conditional duration model
			4.3 The differences­in­differences specification
				An application
			4.4 CoVaR
		5 Cryptocurrencies
			5.1 Some statistical characteristics of cryptocurrencies
			5.2 Cryptos as an asset class and linkages with other financial assets
			5.3 Other attributes of cryptocurrencies
		6 Financial technology
			6.1 Fintech and banking
			6.2 Research on fintech
			6.3 The future of fintech
		Key takeaways
		Test your knowledge
		Test your intuition
Index