Newey-West HAC estimator
Newey-West begins with the OLS estimates:
= ( )1
() = ( )1 ( )1
For no lag, the variance estimates are calculated using Whites (1980) formulation:
=
2
And, for lags m > 0, the variance estimates are calculated using Newey-W
Chapter 7 Data and Applications
Experience is the name everyone gives to their mistakes ~ Oscar Wilde
Introduction
In this chapter, we will analyze security level data at various reporting frequencies, extract
returns, form minimum variance portfolios, co
Homework 4 Consumption CAPM
Consumption CAPM. Load the data file HW4 data.xlsx. There are two annual series a short term interest
rate and real per capital consumption for the United States from 1889 2007.
1. Construct a new series consisting of the annua
Chapter 5 Portfolio Construction
Good management is better than good income ~ Portugese proverb
Introduction
A portfolio consists of a collection of assets. The portfolio itself is an asset too since it is a
collection of assets. The return to the portfol
Generalized Method of Moments
The method of moments estimator starts on the principle that we can estimate a parameter by
replacing the population moment condition with its sample counterpart.
As a first example, the mean of an i.i.d. population is such t
Chapter 6 Optimal Portfolios
The essence of investment management is the management of risks, not the management of returns
~ Benjamin Graham
Introduction
This chapter applies the principles of Chapter 5 toward the construction of portfolios that
characte
Instrumental Variables and GMM
Lets start with the linear factor model
= +
Here, y is a T x1 vector of (excess) returns and X is a T x k matrix of k-factors. In the CAPM, X
would include the T x 1 vector of excess returns on the market portfolio and a c
Chapter 16 Introduction to Options
Money is made by discounting the obvious and betting on the unexpected ~ George Soros
Introduction
I introduce options as hedging instruments in the next chapter. It is instructive, therefore, to
develop some basics on o
Homework 5 Factor Models: Return attribution and macro factor exposures.
Instructions: The data set for this set of exercises is MasterData.xlsx (or MasterData_revised.xlsx your
choice). Use Matlab to answer all questions and prepare an HTML published Mat
HW9B Dynamic Delta Hedge and Gamma Trading (80 points)
Instructions: Download the Dynamic Delta Hedge Template.
Refer to the template spreadsheet provided. Stock A has an annualized expected return of 7% and
annualized volatility equal to 18% for which yo
Chapter 1 Discount Rates and Returns
The most powerful force in the universe is compound interest ~ Albert Einstein
Estimating Returns
The total return on an investment in any security is the percentage change in the value of the
asset including dividends
Homework 7 Monte Carlo Risk Control
Each question is worth 10 points for a total of 50 points.
There are two assets with expected annual returns = [0.07, 0.03] and standard deviations = [0.15,
0.07]. Their correlation coefficient is 0.5.
1. You want to in
Chapter 17 Models of Stock Price Dynamics
What is now proved was once only imagind ~ William Blake
Stock Price Dynamics
In this chapter, we will learn how to construct and model stock price dynamics and then analyze
the characteristics of options pricing
Homework 3: Instrumental Variables and Two Stage Least Squares
Suppose we estimate the following consumption function, where y is a T x 1 vector of consumption
expenditures, x1 is a T x 1 vector of ones and x2* is a T x 1 vector of permanent income.
= 1
Homework 6 Factor Models: Cross-sectional covariance estimates.
Instructions: The data set for this set of exercises is Chapter 9 Examples.xlsx, Fundamentals Data Set. Use
Matlab to answer all questions and prepare an HTML published Matlab report to uploa
Class Notes Factor Models
Single Index Model (CAPM)
= + +
This says that the risk premium to the asset is linear in the risk premium to the market. Assuming
the risk free rate is zero for the moment then expected return is compensated systematic risk
(
Chapter 9 Factor Models
An economist is someone who sees something in the real world and wonders if it would work in theory
~ Ronald Reagan
Introduction
The CAPM can be interpreted as a single index factor model and since we are already familiar
with it,