Index 417
Ex ante justification and financial economic
theory, 307–309
Excess kurtosis, 353
Excess return, 25, 386
Exogenous regressors, 283
Exogenous variables, 17
Expected returns model, 315
Explanatory variables, 14, 38–39, 41, 71,
79, 88, 115–116, 119, 131, 137–140,
235–236, 264, 305, 308, 310–311, 319
Explicit form, 238
Exponential smoothing, 171
Exponentially weighted average (EWMA)
approach, 214
Ex-post tracking error, 10
Factor analysis, 232
Factor analysis and principal components
analysis (PCA)
about, 235
approximate factor models, 261–263
approximate factor models and PCA,
263–264
factor analysis vs. PCA differences,
259–261
factor estimation of, 244–251
factor models assumptions and
categorization, 240–241
factor models basic concepts, 237–240
factor models compared with linear
regression, 242–243
linear regression assumptions, 236–237
principal components analysis, 251–259
step-by-step PCA, 252–259
summary/key points, 265
Factor estimation, 244–251
estimation of number of factors, 245
factor indeterminacy problem, 244
factor scores, 249–251
finite and infinite factor models, 244–245
model parameters estimate, 245–249
other types of, 251
Factor indeterminacy problem, 243–244
Factor loading, 238
Factor models
approximate, 262
assumptions and categorization, 240–241
basic concepts, 237–240
compared with linear regression, 242–243
other types, 251
Factor risk models, 9
Factor scores, 249–251
Factors, 237
Fama, Eugene, 74, 169
Fat tails, 343
F-distribution, 352–353
Finance applications
hedge ratio, 32–36
mutual fund characteristic line, 25–26
stock portfolio risk control, 26–32
Financial bubble, 191
Financial econometrics
about, 1–2
applications to investment management,
6–10
data generating process, 5–6
definition, 2
model estimation, 3–5
model selection, 2–3
model testing, 4–5
summary/key points, 10–11
Financial econometrics and investment
strategies
about, 305–307
investment strategy process, 314–318
quantitative research process, 307–314
summary/key points, 318–319
Finite and infinite factor models, 244–245
French, Kenneth, 74, 169
Frequencies, 332–333
Frequency distribution
continuous vs. discrete variables,
326–327
cumulative frequency distributions,
327–328
empirical cumulative frequency
distribution, 324–326
relative frequency, 323
Frobenius norm of matrix, 249
F-statistic, 47
F-test, 80, 85–87, 120, 140
F-test for inclusion of additional variables,
50–51
Full rank, 389GARCH models/modeling, 223–225
applications to option pricing, 230–231
univariate extensions, 226–228
Gaussian distribution, 344
Gauss-Markov theorem, 276