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slides_2017_l120170831114352.pdf

slides_2017_l120170831114352.pdf - The Econometrics of...

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The Econometrics of Financial Returns. An Introduction Carlo Favero September 2017 Favero () The Econometrics of Financial Returns. An Introduction September 2017 1 / 17
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Why Econometrics? Econometrics is the statistical analysis of economics data. Government (decision on optimal policies: monetary, fiscal, health, education) Business (strategic planning, pricing, advertising, sales, production, investment, inventories) Financial Services (modelling returns and risk) Favero () The Econometrics of Financial Returns. An Introduction September 2017 2 / 17
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The Econometrics of Financial Returns Predicting the distribution of returns of financial assets is a task of primary importance for identifying desirable investments, performing optimal asset allocation within a portfolio, as well as measuring and managing portfolio risk. Horizon at which returns are defined matters for financial and statistical reasons Portfolio allocation, i.e. the choice of optimal weights to be attributed to the different financial assets in a portfolio, is typically based on a long horizon perspective, the measurement of risk of a given portfolio takes typically a very short-horizon perspective. A long-run investor decides her optimal portfolio allocation on the basis of the (joint) distribution of the returns of the relevant financial assets at low frequency. However, the monitoring of the daily risk of her portfolio depends on the statistical properties of the distribution of returns at high frequency. Favero () The Econometrics of Financial Returns. An Introduction September 2017 3 / 17
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The relevant dimensions of the data The statistical properties of the distribution of returns vary with the horizon at which they are defined. There are three relevant dimensions in financial returns time-series cross-section the horizon at which returns are defined Favero () The Econometrics of Financial Returns. An Introduction September 2017 4 / 17
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The relevant dimensions of the data In general, we shall define r i t , t + k as the returns realized by holding between time t and time t + k , the asset i .
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