Contents

About the Contributors
Preface
1 Applications of Advanced Regression Analysis for Trading and Investment
Christian L. Dunis and Mark Williams
Abstract
1.1 Introduction
1.2 Literature review
1.3 The exchange rate and related financial data
1.4 Benchmark models: theory and methodology
1.5 Neural network models: theory and methodology
1.6 Forecasting accuracy and trading simulation
1.7 Concluding remarks
References
2 Using Cointegration to Hedge and Trade International Equities A. Neil Burgess
Abstract
2.1 Introduction
2.2 Time series modelling and cointegration
2.3 Implicit hedging of unknown common risk factors
2.4 Relative value and statistical arbitrage
2.5 Illustration of cointegration in a controlled simulation
2.6 Application to international equities
2.7 Discussion and conclusions
References
3 Modelling the Term Structure of Interest Rates: An Application of Gaussian
Affine Models to the German Yield Curve Nuno Cassola and Jorge Barros Lu'is
Abstract
3.1 Introduction
3.2 Background issues on asset pricing
3.3 Duffie–Kan affine models of the term structure
3.4 A forward rate test of the expectations theory
3.5 Identification
3.6 Econometric methodology and applications
3.7 Estimation results
3.8 Conclusions
References
4 Forecasting and Trading Currency Volatility: An Application of
Recurrent Neural Regression and Model Combination
Christian L. Dunis and Xuehuan Huang
Abstract
4.1 Introduction
4.2 The exchange rate and volatility data
4.3 The GARCH (1,1) benchmark volatility forecasts
4.4 The neural network volatility forecasts
4.5 Model combinations and forecasting accuracy
4.6 Foreign exchange volatility trading models
4.7 Concluding remarks and further work
Acknowledgements
Appendix A
Appendix B
Appendix C
Appendix D
Appendix E
Appendix F
Appendix G
References
5 Implementing Neural Networks, Classification Trees, and Rule
Induction Classification Techniques: An Application to Credit Risk
George T. Albanis
Abstract
5.1 Introduction
5.2 Data description
5.3 Neural networks for classification in Excel
5.4 Classification tree in Excel
5.5 See5 classifier
5.6 Conclusions
References
6 Switching Regime Volatility: An Empirical Evaluation
Bruno B. Roche and Michael Rockinger
Abstract
6.1 Introduction
6.2 The model
6.3 Maximum likelihood estimation
6.4 An application to foreign exchange rates
6.5 Conclusion
References
Appendix A: Gauss code for maximum likelihood for variance switching models
7 Quantitative Equity Investment Management with Time-Varying
Factor Sensitivities
Yves Bentz
Abstract
7.1 Introduction
7.2 Factor sensitivities defined
7.3 OLS to estimate factor sensitivities: a simple, popular but inaccurate method
7.4 WLS to estimate factor sensitivities: a better but still sub-optimal method
7.5 The stochastic parameter regression model and the Kalman filter: the best way to estimate factor sensitivities
7.6 Conclusion
References
8 Stochastic Volatility Models: A Survey with Applications to
Option Pricing and Value at Risk
Monica Billio and Domenico Sartore
Abstract
8.1 Introduction
8.2 Models of changing volatility
8.3 Stochastic volatility models
8.4 Estimation
8.5 Extensions of SV models
8.6 Multivariate models
8.7 Empirical applications
8.8 Concluding remarks
Appendix A: Application of the pentanomial model
Appendix B: Application to Value at Risk
References
9 Portfolio Analysis Using Excel
Jason Laws
Abstract
9.1 Introduction
9.2 The simple Markovitz model
9.3 The matrix approach to portfolio risk
9.4 Matrix algebra in Excel when the number of assets increases
9.5 Alternative optimisation targets
9.6 Conclusion
Bibliography
10 Applied Volatility and Correlation Modelling Using Excel
Frederick Bourgoin
Abstract
10.1 Introduction
10.2 The Basics
10.3 Univariate models
10.4 Multivariate models
10.5 Conclusion
References
11 Optimal Allocation of Trend-Following Rules: An Application
Case of Theoretical Results
Pierre Lequeux
Abstract
11.1 Introduction
11.2 Data
11.3 Moving averages and their statistical properties
11.4 Trading rule equivalence
11.5 Expected transactions cost under assumption of random walk
11.6 Theoretical correlation of linear forecasters
11.7 Expected volatility of MA
11.8 Expected return of linear forecasters
11.9 An applied example
11.10 Final remarks
References
12 Portfolio Management and Information from Over the Counter
Currency Options
Jorge Barros Luis
Abstract
12.1 Introduction
12.2 The valuation of currency options spreads
12.3 RND estimation using option spreads
12.4 Measures of correlation and option prices
12.5 Indicators of credibility of an exchange rate band
12.6 Empirical applications
12.7 Conclusions
References
13 Filling Analysis for Missing Data: An Application to Weather
Risk Management
Christian L. Dunis and Vassilios Karalis
Abstract
13.1 Introduction
13.2 Weather data and weather derivatives
13.3 Alternative filling methods for missing data
13.4 Empirical results
13.5 Concluding remarks
Appendix A
Appendix B
References
Index