Anon

305

Chapter

15

Formulating and Implementing

Investment Strategies Using

Financial econometrics

a

fter reading this chapter you will understand:

■ (^) The financial econometrics research aspect of the quantitative research
process.
■ (^) The purpose of using financial econometric tools is to identify any
persistent pattern in financial data and convert that information into
implementable and profitable investment strategies.
■ (^) The three phases of the quantitative research process: (1) develop an
ex ante justification based on financial economic theory, (2) select a
survivorship-free sample, and (3) estimate a parameter-free model.
■ (^) Common fallacies in the use of financial econometrics to develop invest-
ment strategies.
■ (^) Considerations in deciding on which and how many explanatory vari-
ables should be included in a financial econometrics model.
■ (^) Why in attempting to identify profitable investment strategies there is
concern with overmining of data.
■ (^) The pitfalls of using insufficient data.
■ (^) Why a safeguard against data snooping is to scrutinize the model once
through time.
■ (^) Why after developing a strategy based on some financial econometric
model it is always prudent to test the model against an artificial data set.
(^) This chapter is coauthored with Christopher K. Ma of KCM Asset Management, and
Professor of Finance and Director of the George Investments Institute and Roland
George Investments Program at Stetson University.