Financial econometrics is the application of statistical methods to financial

market data In finance, market data is price and other related data for a financial instrument reported by a trading venue such as a stock exchange. Market data allows traders and investors to know the latest price and see historical trends for instruments ...

. Financial econometrics is a branch of

financial economics Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade".William F. Sharpe"Financial Economics", in Its co ...

, in the field of

economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

. Areas of study include capital markets, financial institutions, corporate finance and corporate governance. Topics often revolve around asset valuation of individual stocks, bonds, derivatives, currencies and other financial instruments. It differs from other forms of

econometrics Econometrics is an application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics", '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8 ...

because the emphasis is usually on analyzing the prices of financial assets traded at competitive, liquid markets. People working in the finance industry or researching the finance sector often use econometric techniques in a range of activities – for example, in support of portfolio management and in the valuation of securities. Financial econometrics is essential for

risk management Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...

when it is important to know how often 'bad' investment outcomes are expected to occur over future days, weeks, months and years.

Topics

The sort of topics that financial econometricians are typically familiar with include: * analysis of high-frequency price observations *

arbitrage pricing theory In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross (economist), Stephen Ross i ...

* asset price dynamics * optimal asset allocation *

cointegration In econometrics, cointegration is a statistical property describing a long-term, stable relationship between two or more time series variables, even if those variables themselves are individually non-stationary (i.e., they have trends). This means ...

* event study * nonlinear financial models such as autoregressive conditional heteroskedasticity * realized variance * fund performance analysis such as

returns-based style analysis Returns-based style analysis (RBSA) is a statistical technique used in finance to deconstruct the returns of investment strategies using a variety of explanatory variables. The model results in a strategy's exposures to asset classes or other fact ...

* tests of the random walk hypothesis * the

capital asset pricing model In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a Diversification (finance), well-diversified Portfolio (f ...

* the term structure of interest rates (the

yield curve In finance, the yield curve is a graph which depicts how the Yield to maturity, yields on debt instruments – such as bonds – vary as a function of their years remaining to Maturity (finance), maturity. Typically, the graph's horizontal ...

) *

value at risk Value at risk (VaR) is a measure of the risk of loss of investment/capital. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically us ...

* volatility estimation techniques such as

exponential smoothing Exponential smoothing or exponential moving average (EMA) is a rule of thumb technique for smoothing time series data using the exponential window function. Whereas in the simple moving average the past observations are weighted equally, exponen ...

models and

RiskMetrics The RiskMetrics variance model (also known as exponential smoother) was first established in 1989, when Sir Dennis Weatherstone, the new chairman of J.P. Morgan, asked for a daily report measuring and explaining the risks of his firm. Nearly ...

Research community

The Society for Financial Econometrics (SoFiE) is a global network of academics and practitioners dedicated to sharing research and ideas in the fast-growing field of financial econometrics. It is an independent non-profit membership organization, committed to promoting and expanding research and education by organizing and sponsoring conferences, programs and activities at the intersection of finance and econometrics, including links to macroeconomic fundamentals. SoFiE was co-founded by Robert F. Engle and Eric Ghysels. Premier-quality journals which publish financial econometrics research include

Econometrica ''Econometrica'' is a peer-reviewed academic journal of economics, publishing articles in many areas of economics, especially econometrics. It is published by Wiley-Blackwell on behalf of the Econometric Society. The current editor-in-chief is ...

, Journal of Econometrics and Journal of Business & Economic Statistics. The Journal of Financial Econometrics has an exclusive focus on financial econometrics. It is edited by Federico Bandi and Andrew Patton, and it has a close relationship with SoFiE. The

Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (), commonly referred to as the Nobel Prize in Economics(), is an award in the field of economic sciences adminis ...

has been awarded for significant contribution to financial econometrics; in 2003 to Robert F. Engle "for methods of analyzing economic time series with time-varying volatility" and

Clive Granger Sir Clive William John Granger (; 4 September 1934 – 27 May 2009) was a British econometrician known for his contributions to nonlinear time series analysis. He taught in Britain, at the University of Nottingham and in the United States, at t ...

"for methods of analyzing economic time series with common trends" and in 2013 to Eugene Fama, Lars Peter Hansen and Robert J. Shiller "for their empirical analysis of asset prices". Other highly influential researchers include Torben G. Andersen, Tim Bollerslev and Neil Shephard.

References

{{Reflist Econometrics Mathematical finance Financial economics Financial data analysis