Encyclopedia of financial models. Volume I / Frank J. Fabozzi, editor.

Format:

Book

Contributor:

Fabozzi, Frank J., editor.

Language:

English

Subjects (All):

Investments--Management--Encyclopedias.

Investments.

Portfolio management--Encyclopedias.

Portfolio management.

Physical Description:

1 online resource (885 pages) : illustrations

Edition:

1st edition

Place of Publication:

Hoboken, New Jersey : John Wiley & Sons, Inc., 2013.

System Details:

text file

Summary:

An essential reference dedicated to a wide array of financial models, issues in financial modeling, and mathematical and statistical tools for financial modeling The need for serious coverage of financial modeling has never been greater, especially with the size, diversity, and efficiency of modern capital markets. With this in mind, the Encyclopedia of Financial Models, 3 Volume Set has been created to help a broad spectrum of individuals—ranging from finance professionals to academics and students—understand financial modeling and make use of the various models currently available. Incorporating timely research and in-depth analysis, the Encyclopedia of Financial Models is an informative 3-Volume Set that covers both established and cutting-edge models and discusses their real-world applications. Edited by Frank Fabozzi, this set includes contributions from global financial experts as well as academics with extensive consulting experience in this field. Organized alphabetically by category, this reliable resource consists of three separate volumes and 127 entries—touching on everything from asset pricing and bond valuation models to trading cost models and volatility—and provides readers with a balanced understanding of today's dynamic world of financial modeling. This 3-Volume Set contains coverage of the fundamentals and advances in financial modeling and provides the mathematical and statistical techniques needed to develop and test financial models Emphasizes both technical and implementation issues, providing researchers, educators, students, and practitioners with the necessary background to deal with issues related to financial modeling Each volume includes a complete table of contents and index for easy access to various parts of the encyclopedia Financial models have become increasingly commonplace, as well as complex. They are essential in a wide range of financial endeavors, and this 3-Volume Set will help put them in perspective.

Contents:

Intro

ENCYCLOPEDIA OF FINANCIAL MODELS

About the Editor

Contents

Contributors

Preface

Guide to the Encyclopedia of Financial Models

Asset Allocation

Mean-Variance Model for Portfolio Selection

SOME BASIC CONCEPTS

Utility Function and Indifference Curves

The Set of Efficient Portfolios and the Optimal Portfolio

Risky Assets vs. Risk-Free Assets

MEASURING A PORTFOLIO'S EXPECTED RETURN

Measuring Single-Period Portfolio Return

The Expected Return of a Portfolio of Risky Assets

MEASURING PORTFOLIO RISK

Variance and Standard Deviation as a Measure of Risk

Covariance

Measuring the Risk of a Portfolio Consisting of More than Two Assets

PORTFOLIO DIVERSIFICATION

The Effect of the Correlation of Asset Returns on Portfolio Risk

CHOOSING A PORTFOLIO OF RISKY ASSETS

Constructing Efficient Portfolios

Feasible and Efficient Portfolios

Choosing the Optimal Portfolio in the Efficient Set

Example Using the MSCI World Country Indexes

ROBUST PORTFOLIO OPTIMIZATION

KEY POINTS

NOTES

REFERENCES

Principles of Optimization for Portfolio Selection

UNCONSTRAINED OPTIMIZATION

Minima and Maxima of a Differentiable Function

Convex Functions

Quasi-Convex Functions

CONSTRAINED OPTIMIZATION

Lagrange Multipliers

Convex Programming

Linear Programming

Quadratic Programming

Asset Allocation and Portfolio Construction Techniques in Designing the Performance-Seeking Portfolio

THE TANGENCY PORTFOLIO AS THE RATIONALE BEHIND SHARPE RATIO MAXIMIZATION

ROBUST ESTIMATORS FOR COVARIANCE PARAMETERS

ROBUST ESTIMATORS FOR EXPECTED RETURNS

IMPLICATIONS FOR BENCHMARK PORTFOLIO CONSTRUCTION

ASSET ALLOCATION MODELING: PUTTING THE EFFICIENT BUILDING BLOCKS TOGETHER

Asset Pricing Models.

General Principles of Asset Pricing

ONE-PERIOD FINITE STATE ECONOMY

PORTFOLIOS AND MARKET COMPLETENESS

Redundant Assets

Complete Market

THE LAW OF ONE PRICE AND LINEAR PRICING

Linear Pricing

State Price

ARBITRAGE AND POSITIVE STATE PRICING

THE FUNDAMENTAL THEOREM OF ASSET PRICING

The Discount Factor

Pricing Using Risk-Neutral Probabilities

DISCOUNT FACTOR MODELS

STOCHASTIC DISCOUNT FACTORS

Application to CAPM and APT

Hansen-Jagannathan Bound

Capital Asset Pricing Models

INTRODUCTION

SHARPE-LINTNER CAPM

ROY CAPM

CONFUSIONS REGARDING THE CAPM

TWO MEANINGS OF MARKET EFFICIENCY

A Simple Market

Arbitrage

Expected Returns and Betas

Limited Borrowing

Further Generalizations

CAPM INVESTORS DO NOT GET PAID FOR BEARING RISK

THE "TWO BETA" TRAP

Beta1963

Beta1964

Propositions about Betas

Modeling Asset Price Dynamics

FINANCIAL TIME SERIES

BINOMIAL TREES

ARITHMETIC RANDOM WALKS

Simulation

Parameter Estimation

Arithmetic Random Walks: Some Additional Facts

GEOMETRIC RANDOM WALKS

Geometric Random Walk: Some Additional Facts

MEAN REVERSION

Geometric Mean Reversion

ADVANCED RANDOM WALK MODELS

Correlated Random Walks

Incorporating Jumps

Stochastic Volatility

STOCHASTIC PROCESSES

Arbitrage Pricing: Finite-State Models

THE ARBITRAGE PRINCIPLE

ARBITRAGE PRICING IN A ONE-PERIOD SETTING

State Prices

Risk-Neutral Probabilities

Complete Markets

ARBITRAGE PRICING IN A MULTIPERIOD FINITE-STATE SETTING

Propagation of Information

Trading Strategies

State-Price Deflator

Equivalent Martingale Measures

Risk-Neutral Probabilities.

THE BINOMIAL MODEL

Risk-Neutral Probabilities for the Binomial Model

ARBITRAGE PRICING IN A DISCRETE-TIME, CONTINUOUS-STATE SETTING

Arbitrage Pricing: Continuous-State, Continuous-Time Models

THE ARBITRAGE PRINCIPLE IN CONTINUOUS TIME

Trading Strategies and Trading Gains

ARBITRAGE PRICING IN CONTINUOUS-STATE, CONTINUOUS-TIME

OPTION PRICING

Stock Price Processes

Hedging

The Black-Scholes Option Pricing Formula

Generalizing the Pricing of European Options

STATE-PRICE DEFLATORS

EQUIVALENT MARTINGALE MEASURES

EQUIVALENT MARTINGALE MEASURES AND GIRSANOV'S THEOREM

The Diffusion Invariance Principle

Application of Girsanov's Theorem to Black-Scholes Option Pricing Formula

EQUIVALENT MARTINGALE MEASURES AND COMPLETE MARKETS

EQUIVALENT MARTINGALE MEASURES AND STATE PRICES

ARBITRAGE PRICING WITH A PAYOFF RATE

IMPLICATIONS OF THE ABSENCE OF ARBITRAGE

WORKING WITH EQUIVALENT MARTINGALE MEASURES

Bayesian Analysis and Financial Modeling Applications

Basic Principles of Bayesian Analysis

THE LIKELIHOOD FUNCTION

The Poisson Distribution Likelihood Function

The Normal Distribution Likelihood Function

BAYES' THEOREM

Bayes' Theorem and Model Selection

Bayes' Theorem and Classification

Bayesian Inference for the Binomial Probability

Introduction to Bayesian Inference

PRIOR INFORMATION

Informative Prior Elicitation

Noninformative Prior Distributions

Conjugate Prior Distributions

Empirical Bayesian Analysis

POSTERIOR INFERENCE

Posterior Point Estimates

Bayesian Intervals

Bayesian Hypothesis Comparison

BAYESIAN PREDICTIVE INFERENCE

ILLUSTRATION: POSTERIOR TRADE-OFF AND THE NORMAL MEAN PARAMETER

REFERENCES.

Bayesian Linear Regression Model

THE UNIVARIATE LINEAR REGRESSION MODEL

Bayesian Estimation of the Univariate Regression Model

Illustration: The Univariate Linear Regression Model

THE MULTIVARIATE LINEAR REGRESSION MODEL

Diffuse Improper Prior

Bayesian Estimation of ARCH-Type Volatility Models

BAYESIAN ESTIMATION OF THE GARCH(1,1) MODEL

Distributional Setup

Posterior Distributions

Posterior Simulations with the Metropolis-Hastings Algorithm

MARKOV-SWITCHING GARCH MODELS

Preliminaries

Prior Distributional Assumptions

Estimation of the MS GARCH Model

APPENDIX: THE GRIDDY GIBBS SAMPLER

Drawing from the Conditional Posterior Distribution of ν

Bayesian Techniques and the Black-Litterman Model

PRACTICAL PROBLEMS ENCOUNTERED IN MEAN-VARIANCE OPTIMIZATION

Example: The True, Estimated, and Actual Efficient Frontiers

Sensitivity to Estimation Error

Incorporating Uncertainty in the Inputs into the Portfolio Allocation Process

Large Data Requirements

SHRINKAGE ESTIMATION

THE BLACK-LITTERMAN MODEL

Derivation of the Black-Litterman Model

Bond Valuation

Basics of Bond Valuation

GENERAL PRINCIPLES OF BOND VALUATION

Estimating Cash Flows

Determining the Appropriate Interest Rate or Rates

Discounting the Expected Cash Flows

Determining a Bond's Value

The Price/Discount Rate Relationship

Time Path of Bond

ARBITRAGE-FREE BOND VALUATION

Theoretical Spot Rates

Valuation Using Treasury Spot Rates

Reason for Using Treasury Spot Rates

Stripping and Arbitrage-Free Valuation

Credit Spreads and the Valuation of Non-Treasury Securities

Relative Value Analysis of Fixed-Income Products.

YIELD SPREADS OVER SWAP AND TREASURY CURVES

ASSET SWAPS

Asset Swap Mechanics

Par versus Market Structures

Determining the Asset Swap Spread in the General Case

Uses of Asset Swaps

A Miscellany of Asset Swaps

CREDIT DEFAULT SWAPS

Credit Default Swap Basis

Yield Curves and Valuation Lattices

THE INTEREST RATE LATTICE

Determining the Value at a Node

CALIBRATING THE LATTICE

USING THE LATTICE FOR VALUATION

NOTE

Using the Lattice Model to Value Bonds with Embedded Options, Floaters, Options, and Caps/Floors

FIXED-COUPON BONDS WITH EMBEDDED OPTIONS

Valuing a Callable Bond

Valuing a Putable Bond

FLOATING-COUPON BONDS WITH EMBEDDED OPTIONS

Valuing Capped Floating-Rate Bonds

Callable Capped Floating-Rate Bonds

VALUING CAPS AND FLOORS

VALUATION OF TWO MORE EXOTIC STRUCTURES

Valuing a Step-Up Callable Note

Valuing a Range Note

VALUING AN OPTION ON A BOND

EXTENSIONS

Option-Adjusted Spread

Effective Duration and Effective Convexity

Understanding the Building Blocks for OAS Models

IS IT EQUILIBRIUM OR AN ARBITRAGE MODEL?

WHICH IS THE RIGHT MODEL OF THE INTEREST RATE PROCESS?

TERM STRUCTURE MODELS: WHICH IS THE RIGHT APPROACH FOR OAS?

Lattice Method

Monte Carlo Method

IS THERE A RIGHT WAY TO MODEL PREPAYMENTS?

Quantitative Models to Value Convertible Bonds

ANALYTICAL MODELS

The Ingersoll Model

NUMERICAL MODELS

The Binomial Tree Model

Quantitative Approaches to Inflation-Indexed Bonds

BOND STRUCTURES AND THE CONCEPT OF REAL YIELD

Causes of Real Yield Volatility

Existence of an Inflation Risk Premium

INFLATION-INDEXED BONDS IN A NOMINAL PORTFOLIO.

What Is the Duration of an Inflation-Indexed Bond?.

Notes:

Includes bibliographical references at the end of each chapters and index.

Description based on online resource; title from PDF title page (ebrary, viewed February 3, 2017).

ISBN:

9781118010327

1118010329

OCLC:

970631559