An Introduction to Analysis of Financial Data with R

Ruey S. Tsay

• Publisher: Wiley
• Year: 2014
• ISBN:
  9781119013464
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

A complete set of statistical tools for beginning financial analysts from a leading authority

Written by one of the leading experts on the topic, An Introduction to Analysis of Financial Data with R explores basic concepts of visualization of financial data. Through a fundamental balance between theory and applications, the book supplies readers with an accessible approach to financial econometric models and their applications to real-world empirical research.

The author supplies a hands-on introduction to the analysis of financial data using the freely available R software package and case studies to illustrate actual implementations of the discussed methods. The book begins with the basics of financial data, discussing their summary statistics and related visualization methods. Subsequent chapters explore basic time series analysis and simple econometric models for business, finance, and economics as well as related topics including:

• Linear time series analysis, with coverage of exponential smoothing for forecasting and methods for model comparison
• Different approaches to calculating asset volatility and various volatility models
• High-frequency financial data and simple models for price changes, trading intensity, and realized volatility
• Quantitative methods for risk management, including value at risk and conditional value at risk
• Econometric and statistical methods for risk assessment based on extreme value theory and quantile regression

Throughout the book, the visual nature of the topic is showcased through graphical representations in R, and two detailed case studies demonstrate the relevance of statistics in finance. A related website features additional data sets and R scripts so readers can create their own simulations and test their comprehension of the presented techniques.

An Introduction to Analysis of Financial Data with R is an excellent book for introductory courses on time series and business statistics at the upper-undergraduate and graduate level. The book is also an excellent resource for researchers and practitioners in the fields of business, finance, and economics who would like to enhance their understanding of financial data and today's financial markets.

1

FINANCIAL DATA AND THEIR PROPERTIES

The importance of quantitative methods in business and finance has increased substantially in recent years because we are in a data-rich environment and the economies and financial markets are more integrated than ever before. Data are collected systematically for thousands of variables in many countries and at a finer timescale. Computing facilities and statistical packages for analyzing complicated and high dimensional financial data are now widely available. As a matter of fact, with an internet connection, one can easily download financial data from open sources within a software package such as R. All of these good features and capabilities are free and widely accessible.

The objective of this book is to provide basic knowledge of financial time series, introduce statistical tools useful for analyzing financial data, and gain experience in financial applications of various econometric methods. We begin with the basic concepts of financial data to be analyzed throughout the book. The software R is introduced via examples. We also discuss different ways to visualize financial data in R. Chapter 2 reviews basic concepts of linear time series analysis such as stationarity and autocorrelation function, introduces simple linear models for handling serial dependence of the data, and discusses regression models with time series errors, seasonality, unit-root nonstationarity, and long-memory processes. The chapter also considers exponential smoothing for forecasting and methods for model comparison. Chapter 3 considers some applications of the models introduced in Chapter 2 in the form of case studies. The goal is to help readers understand better data analysis, empirical modeling, and making inference. It also points out the limitations of linear time series models in long-term prediction. Chapter 4 focuses on modeling conditional heteroscedasticity (i.e., the conditional variance of an asset return). It introduces various econometric models for describing the evolution of asset volatility over time. The chapter also discusses alternative methods to volatility modeling, including use of daily high and low prices of an asset. In Chapter 5, we demonstrate some applications of volatility models using, again, some case studies. All steps for building volatility models are given, and the merits and weaknesses of various volatility models are discussed, including the connection to diffusion limit of continuous time models. Chapter 6 is concerned with analysis of high frequency financial data. It starts with special characteristics of high frequency data and gives models and methods that can be used to analyze such data. It shows that nonsynchronous trading and bid-ask bounce can introduce serial correlations in a stock return. It also studies the dynamic of time duration between trades and some econometric models for analyzing transaction data. In particular, we discuss the use of logistic linear regression and probit models to study the stock price movements in consecutive trades. Finally, the chapter studies the realized volatility using intraday log returns. Chapter 7 discusses risk measures of a financial position and their use in risk management. It introduces value at risk and conditional value at risk to quantify the risk of a financial position within a holding period. It also provides various methods for calculating risk measures for a financial position, including RiskMetrics, econometric modeling, extreme value theory, quantile regression, and peaks over thresholds.

The book places great emphasis on application and empirical data analysis. Every chapter contains real examples, and, in many occasions, empirical characteristics of financial time series are used to motivate the development of econometric models. In some cases, simple R scripts are given on the web page for specific analysis. Many real data sets are also used in the exercises of each chapter.

1.1 ASSET RETURNS

Most financial studies involve returns, instead of prices, of assets. Campbell et al. (1997) give two main reasons for using returns. First, for average investors, return of an asset is a complete and scale-free summary of the investment opportunity. Second, return series are easier to h...