Course description

Financial Econometrics

Introduction

Financial Econometrics can be understood as the application of statistical techniques to answer questions in finance. Financial Econometrics can therefore be used to test theories in finance. As such, it is supports financial decision-making.

Course content

Introduction

  • What is Financial Econometrics about
  • Types of financial data
  • Returns in financial modelling
  • Steps involved in formulating an econometric model

Mathematical and statistical foundations

  • Functions
  • Matrices
  • Probability and probability distributions
  • Descriptive statistics

The classical linear regression model

  • Regression versus correlation
  • Simple regression
  • The assumptions underlying the classical linear regression model
  • Properties of the OLS etsimator
  • Precision and standard errors
  • Statistical inference

Further development and analysis of the classical linear regression model

  • Multiple regression
  • Testing multiple hypothesis: the F-test
  • Goodness of fit statistics

Classical linear regression model assumptions and the diagnostic tests

  • Heteroscedasticity
  • Autocorrelation
  • Non-stochastic explanatory variables
  • Multicolinearity
  • Specification mistakes and biases
  • Parameter stability tests

Learning outcome knowledge

During the course students should develop knowledge of:

  • The role of Financial Econometrics in financial research.
  • The steps involved in formulating, estimating, and evaluating an econometric model.
  • The role of descriptive statistics.
  • The difference between correlation and regression.
  • The concept of regression analysis using Ordinary Least Squares (OLS).
  • Statistical inference within the regression model.
  • How violations of the classical assumptions under lying OLS affect the regression model.
  • Different model mis-specifications and biases.
  • The concept of parameter stability/structural breaks.

Exam organisation

  • Written assignment: 20%
  • Written assignment: 20%
  • Written exam: 60%