Applied Econometrics: A Simple Introduction
5/5
()
About this ebook
Applied Econometrics: A Simple Introduction offers a detailed guide to some of the central methods and applications of applied econometrics, with theory, models, calculations, and graphs to support analysis.
S&P 500 equities, GSCI commodities, and US Treasury Bill risk-free rate datasets are assessed for their data distributions, autocorrelation, and stationarity. The Engle-Granger 2 step method, Johansen test and the Vector Error Correction Model test for and correct cointegration.
ARMA models determine the optimal AR and MA processes to model returns data, and GARCH models assess the optimal p and q number of lags to model variance, using the Akaike Information Criterion. Alternative GARCH versions are examined.
Dynamic portfolio strategies are evaluated using Sharpe Ratio portfolio performance evaluation tools, with a focus on the 2007-8 global financial crisis period. Static portfolio strategies are assessed using ARMA return and GARCH variance forecasting. Results are used alongside established financial literature to assess the optimal portfolio strategy.
Read more from K.H. Erickson
Game Theory: A Simple Introduction Rating: 4 out of 5 stars4/5Corporate Finance Formulas: A Simple Introduction Rating: 4 out of 5 stars4/5Microeconomics: A Simple Introduction Rating: 4 out of 5 stars4/5Financial Risk Management: A Simple Introduction Rating: 4 out of 5 stars4/5Economics: A Simple Introduction Rating: 4 out of 5 stars4/5Accounting and Finance Formulas: A Simple Introduction Rating: 4 out of 5 stars4/5Financial Economics: A Simple Introduction Rating: 5 out of 5 stars5/5Corporate Finance: A Simple Introduction Rating: 5 out of 5 stars5/5International Relations: A Simple Introduction Rating: 5 out of 5 stars5/5Marketing Management Concepts and Tools: A Simple Introduction Rating: 3 out of 5 stars3/5Security Valuation: A Simple Introduction Rating: 5 out of 5 stars5/5Game Theory for Business: A Simple Introduction Rating: 4 out of 5 stars4/5Econometrics: A Simple Introduction Rating: 4 out of 5 stars4/5Investment Appraisal: A Simple Introduction Rating: 4 out of 5 stars4/5Environmental Economics: A Simple Introduction Rating: 5 out of 5 stars5/5Mathematical Formulas for Economics and Business: A Simple Introduction Rating: 4 out of 5 stars4/5Choice Theory: A Simple Introduction Rating: 5 out of 5 stars5/5Investment Formulas: A Simple Introduction Rating: 0 out of 5 stars0 ratingsMethods of Microeconomics: A Simple Introduction Rating: 5 out of 5 stars5/5
Related to Applied Econometrics
Related ebooks
Security Valuation: A Simple Introduction Rating: 5 out of 5 stars5/5Financial Econometrics: Problems, Models, and Methods Rating: 4 out of 5 stars4/5Methods for Applied Macroeconomic Research Rating: 3 out of 5 stars3/5Multi-Asset Risk Modeling: Techniques for a Global Economy in an Electronic and Algorithmic Trading Era Rating: 5 out of 5 stars5/5Understanding DSGE models: Theory and Applications Rating: 0 out of 5 stars0 ratingsEconometrics: A Simple Introduction Rating: 4 out of 5 stars4/5Methods of Microeconomics: A Simple Introduction Rating: 5 out of 5 stars5/5Handbook of Econometrics Rating: 5 out of 5 stars5/5Investment Formulas: A Simple Introduction Rating: 0 out of 5 stars0 ratingsFinancial Economics: A Simple Introduction Rating: 5 out of 5 stars5/5Mathematical Formulas for Economics and Business: A Simple Introduction Rating: 4 out of 5 stars4/5Game Theory for Business: A Simple Introduction Rating: 4 out of 5 stars4/5Essentials of Applied Econometrics Rating: 0 out of 5 stars0 ratingsProbability, Statistics and Econometrics Rating: 0 out of 5 stars0 ratingsFinance: A Quantitative Introduction Rating: 4 out of 5 stars4/5Mostly Harmless Econometrics: An Empiricist's Companion Rating: 4 out of 5 stars4/5Handbook of Economic Forecasting Rating: 0 out of 5 stars0 ratingsFinancial Mathematics Rating: 5 out of 5 stars5/5Microeconomic Foundations I: Choice and Competitive Markets Rating: 4 out of 5 stars4/5Learn Econometrics Fast Rating: 0 out of 5 stars0 ratingsHandbook of Monetary Economics Rating: 5 out of 5 stars5/5Choice Theory: A Simple Introduction Rating: 5 out of 5 stars5/5Handbook of Macroeconomics Rating: 5 out of 5 stars5/5Introduction to R for Quantitative Finance Rating: 4 out of 5 stars4/5Schaum's Outline of Introduction to Mathematical Economics, 3rd Edition Rating: 4 out of 5 stars4/5Foundations of Econometrics Rating: 0 out of 5 stars0 ratingsStochastic Calculus for Quantitative Finance Rating: 0 out of 5 stars0 ratingsThe Theory of Corporate Finance Rating: 4 out of 5 stars4/5Forecasting Economic Time Series Rating: 5 out of 5 stars5/5
Economics For You
The Intelligent Investor, Rev. Ed: The Definitive Book on Value Investing Rating: 4 out of 5 stars4/5Quiet Leadership: Six Steps to Transforming Performance at Work Rating: 4 out of 5 stars4/5The Richest Man in Babylon: The most inspiring book on wealth ever written Rating: 5 out of 5 stars5/5Think in Systems: The Art of Strategic Planning, Effective Rating: 4 out of 5 stars4/5Economics 101: From Consumer Behavior to Competitive Markets--Everything You Need to Know About Economics Rating: 4 out of 5 stars4/5You Can't Lie to Me: The Revolutionary Program to Supercharge Your Inner Lie Detector and Get to the Truth Rating: 4 out of 5 stars4/5Divergent Mind: Thriving in a World That Wasn't Designed for You Rating: 4 out of 5 stars4/5Wise as Fu*k: Simple Truths to Guide You Through the Sh*tstorms of Life Rating: 4 out of 5 stars4/5Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail Rating: 4 out of 5 stars4/5The Hard Truth About Soft Skills: Soft Skills for Succeeding in a Hard Wor Rating: 3 out of 5 stars3/5Economics For Dummies, 3rd Edition Rating: 5 out of 5 stars5/5A History of Central Banking and the Enslavement of Mankind Rating: 5 out of 5 stars5/5The Lords of Easy Money: How the Federal Reserve Broke the American Economy Rating: 4 out of 5 stars4/5Confessions of an Economic Hit Man, 3rd Edition Rating: 5 out of 5 stars5/5Chip War: The Fight for the World's Most Critical Technology Rating: 4 out of 5 stars4/5Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions Rating: 4 out of 5 stars4/5Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are Rating: 4 out of 5 stars4/5Sex Trafficking: Inside the Business of Modern Slavery Rating: 4 out of 5 stars4/5Bottle of Lies: The Inside Story of the Generic Drug Boom Rating: 4 out of 5 stars4/5Men without Work: Post-Pandemic Edition (2022) Rating: 5 out of 5 stars5/5Capitalism and Freedom Rating: 4 out of 5 stars4/5Disrupting Sacred Cows: Navigating and Profiting in the New Economy Rating: 0 out of 5 stars0 ratingsThe Affluent Society Rating: 4 out of 5 stars4/5Capital in the Twenty-First Century Rating: 4 out of 5 stars4/5Talking to My Daughter About the Economy: or, How Capitalism Works--and How It Fails Rating: 4 out of 5 stars4/5Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism Rating: 4 out of 5 stars4/5Bait and Switch: The (Futile) Pursuit of the American Dream Rating: 3 out of 5 stars3/5
Reviews for Applied Econometrics
2 ratings0 reviews
Book preview
Applied Econometrics - K.H. Erickson
Applied Econometrics: A Simple Introduction
By K.H. Erickson
Copyright © 2015 K.H. Erickson
All rights reserved.
No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the author.
Also by K.H. Erickson
Simple Introductions
Accounting and Finance Formulas
Applied Econometrics
Choice Theory
Corporate Finance Formulas
eBay
Econometrics
Economics
Financial Economics
Financial Risk Management
Game Theory
Game Theory for Business
International Relations
Investment Appraisal
Investment Formulas
Marketing Management Concepts and Tools
Mathematical Formulas for Economics and Business
Methods of Microeconomics
Microeconomics
Table of Contents
1 Introduction
2 Data Selection
3 Price Analysis
3.1 Data Distribution
3.2 Stationarity, and Autocorrelation
3.3 Unit Root Test
3.4 Differenced Data
3.5 Cointegration Tests and Correction
4 Return Analysis
4.1 AR and MA Processes
4.2 Akaike Information Criterion
4.3 ARMA Models, Means and Volatility
5 Volatility Analysis
5.1 GARCH Model
5.2 AIC for GARCH
5.3 GARCH Models, Means and Volatility
6 Portfolio Strategy
6.1 Dynamic Portfolio Strategy
6.2 Static Portfolio Strategy and Forecasting
6.3 Optimum Portfolio Strategy and Conclusions
Bibliography
1 Introduction
This book applies established econometric concepts and methods to a large sample of empirical financial market data, to provide both an insight into the potential real world applications of econometrics, and a detailed examination of the financial investment market over the chosen period. Building on basic econometrics knowledge and theory the book explores the issues which economic and financial data can present in practice. There is extensive use of graphs and model values throughout the book, all calculated with OxMetrics econometric software.
The next section explains the selection of the equities, commodities and risk-free rate of return data which comprise the datasets for this book, and notes how this data will be used to conduct analysis. Three chapters then follow which look at price, return and volatility analysis in turn. Price analysis first examines the distribution of data, then tests for stationarity, using Autocorrelation Functions (ACF) and Partial Autocorrelation Functions (PACF), and a Dickey-Fuller (DF) unit root test. Next data is differenced to ensure stationarity is met, followed by cointegration tests, with the Engle-Granger 2 step method and Error Correction Model (ECM), and the Johansen technique and Vector Error Correction Model (VECM).
Returns are what ultimately motivate financial market investors, and changes in prices are used to give returns for a chapter on return analysis. Return data is examined for Autoregressive (AR) and Moving Average (MA) processes, and the two are combined to form an ARMA model with the Box-Jenkins method. The Akaike Information Criterion (AIC) is then used to calculate the ARMA model which best fits the data, and to find the number of AR and MA lags required to accurately model the equities, commodities, and risk-free rate returns data.
Risk is the other area which concerns investors, and a chapter explores this in depth. With an ARMA model used to model returns a Generalized Autoregressive Conditionally Heteroskedastic (GARCH) model can be used to model the return conditional variance. The Akaike Information Criterion (AIC) is again used to find the optimum number of lags for this GARCH variance model, for each of the equities, commodities, and risk-free rate datasets. After the number of lags is decided GARCH model variations are assessed to improve the accuracy of the conditional variance model further, and the AIC compares EGARCH, GJR-GARCH, and GARCH-M variations. The chosen variation is then used to find the GARCH model variance, and from there the model volatility and risk.
With optimal ARMA and GARCH models selected, and return and volatility mean values calculated for the equities, commodities, and risk-free rate data, the issue of a portfolio management strategy can then be examined. First, a dynamic portfolio management strategy is analysed, using the Sharpe Ratio portfolio performance evaluation tool. The popular strategy to sell off equities and replace them with commodities during market downturns is explored in the midst of the 2007-2008 global financial crisis, as the performance of portfolios which stuck by equities are compared to those which switched to commodities.
A static unchanging portfolio management strategy is examined, using the optimal ARMA and GARCH models calculated earlier, and using the empirical relationship between equities and commodities to determine the portfolio weighting for the different assets. The model’s forecasted returns, volatility and variance are then compared to the actual empirical returns and volatility, to determine the accuracy of forecasts and assess the strategy of holding an unchanging static portfolio.
The final section examines the general issues associated with each of the differing dynamic and static portfolio management strategies. Empirical evidence from this book is combined with theory from literature on the topic, and some conclusions are drawn on the factors driving an effective portfolio management strategy.
2 Data Selection
Three different types of financial data are used as the dataset for this book; equities (stocks and shares); commodities; and risk-free assets. The choice of these three types of data serves several purposes. First, they represent the various main types of investment available to a prospective market investor. Equities represent assets relating to subsections