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This book contains several innovative models for the prices of financial assets. First published in 1986, it is a classic text in the area of financial econometrics. It presents ARCH and stochastic volatility models that are often used and cited in academic research and are applied by quantitative analysts in many banks. Another often-cited contribution of the first edition is the documentation of statistical characteristics of financial returns, which are referred to as stylized facts. This second edition takes into account the remarkable progress made by empirical researchers during the past two decades from 1986 to 2006. In the new Preface, the author summarizes this progress in two key areas: firstly, measuring, modelling and forecasting volatility; and secondly, detecting and exploiting price trends. Contents: Features of Financial Returns; Modelling Price Volatility; Forecasting Standard Deviations; The Accuracy of Autocorrelation Estimates; Testing the Random Walk Hypothesis; Forecasting Trends in Prices; Evidence Against the Efficiency of Futures Markets; Valuing Options; Appendix: A Computer Program for Modelling Financial Time Series.
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n M od ellin g Fin an cia1 Time Series Second Edition This page intentionally left blank Modelling Financial Time Serices h STEPHEN J * TAYLOR Imcaster University, UK world scientific Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore 596224 USA oflice: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601 UK ofice: 57 Shelton Street, Covent Garden, London WC2H 9HE Library of Congress Cataloging-in-PublicationData Taylor, Stephen (Stephen J.) Modelling financial time series / b y Stephen J Taylor. -- 2nd ed. p. cm. Reprint of the edition originally published: Chichester [West Sussex] ; New York : Wiley, c1986. Includes bibliographical references and index. ISBN-I 3: 978-981-277-084-4 ISBN- 10: 98 1 -277-084-4 1. Stocks--Prices--Mathematical models. 2. Commodity exchanges--Mathematical models. 3. Financial futures--Mathematical models. 4. Time-series analysis. I. Title. HG4636.T35 2007 332.63'22201 1--dc22 2007043574 British Library Cataloguing-in-PublicationData A catalogue record for this book is available from the British Library. Copyright 0 2008 by World Scientific Publishing Co. Re. Ltd. All rights reserved. This book. or parts thereof; may not be reproduced in any form or by any means, electronic. or tnechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission,from the Publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, M A 01923, USA. In this case permission to photocopy is not required from the publisher. Printed in Singapore by World Scientific Printers ( S ) Pte Ltd To my priceless wife SaIly This page intentionally left blank Contents- Preface to the 2nd edition Page xv Preface to the 1st edition xxv 1 INTRODUCTION 1 .I Financial time series 1.2 About this study 1.3 The world’s major financial markets 1.4 Examples of daily price series 1.5 A selective review of previous research important questions The random walk hypothesis The efficient market hypothesis 1.6 Daily returns 1.7 Models 1.8 Models in this book 1.9 Stochastic processes General remarks Stationary processes Autocorrelation Spectral density White noise ARMA processes Gaussian processes 1.I0 Linear stochastic processes Their definition Autocorrelation tests 1 1 2 3 4 8 8 8 10 12 13 15 16 16 16 17 18 19 20 23 23 23 24 FEATURES OF FINANCIAL RETURNS Constructing financial time series Sources T