Financial econometrics is the application of statistical methods to financial

market data ''For market data as used in marketing, see marketing information system'' In finance, market data is price and other related data for a financial instrument reported by a trading venue such as a stock exchange. Market data allows traders and ...

. Financial econometrics is a branch of

financial economics Financial economics, also known as finance, is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on ''both sides'' of a trade". William F. Sharpe"Financia ...

, in the field of

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...

. Areas of study include capital markets, financial institutions, corporate finance and corporate governance. Topics often revolve around asset valuation of individual stocks, bonds, derivatives, currencies and other financial instruments. It differs from other forms of

econometrics Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. ...

because the emphasis is usually on analyzing the prices of financial assets traded at competitive, liquid markets. People working in the finance industry or researching the finance sector often use econometric techniques in a range of activities – for example, in support of portfolio management and in the valuation of securities. Financial econometrics is essential for risk management when it is important to know how often 'bad' investment outcomes are expected to occur over future days, weeks, months and years.

Topics

The sort of topics that financial econometricians are typically familiar with include: * analysis of high-frequency price observations *

arbitrage pricing theory In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, it is widely beli ...

* asset price dynamics * optimal asset allocation * cointegration * event study * nonlinear financial models such as autoregressive conditional heteroskedasticity * realized variance * fund performance analysis such as returns-based style analysis * tests of the

random walk hypothesis The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk (so price changes are random) and thus cannot be predicted. History The concept can be traced to French broker Jules Regnault who ...

* the

capital asset pricing model In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. The model takes into ac ...

* the term structure of interest rates (the

yield curve In finance, the yield curve is a graph which depicts how the yields on debt instruments - such as bonds - vary as a function of their years remaining to maturity. Typically, the graph's horizontal or x-axis is a time line of months or ye ...

) *

value at risk Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by ...

* volatility estimation techniques such as

exponential smoothing Exponential smoothing is a rule of thumb technique for smoothing time series data using the exponential window function. Whereas in the simple moving average the past observations are weighted equally, exponential functions are used to assign expo ...

models and

RiskMetrics The RiskMetrics variance model (also known as exponential smoother) was first established in 1989, when Sir Dennis Weatherstone, the new chairman of J.P. Morgan, asked for a daily report measuring and explaining the risks of his firm. Nearly f ...

Research community

The Society for Financial Econometrics (SoFiE) is a global network of academics and practitioners dedicated to sharing research and ideas in the fast-growing field of financial econometrics. It is an independent non-profit membership organization, committed to promoting and expanding research and education by organizing and sponsoring conferences, programs and activities at the intersection of finance and econometrics, including links to macroeconomic fundamentals. SoFiE was co-founded by Robert F. Engle and Eric Ghysels. Premier-quality journals which publish financial econometrics research include

Econometrica ''Econometrica'' is a peer-reviewed academic journal of economics, publishing articles in many areas of economics, especially econometrics. It is published by Wiley-Blackwell on behalf of the Econometric Society. The current editor-in-chief is ...

Journal of Econometrics The ''Journal of Econometrics'' is a scholarly journal in econometrics. It was first published in 1973. Its current managing editors are Serena Ng and Elie Tamer, Torben Andersen and Xiaohong Chen serve as editors. The journal publishes work d ...

and Journal of Business & Economic Statistics. The Journal of Financial Econometrics has an exclusive focus on financial econometrics. It is edited by Federico Bandi and Andrew Patton, and it has a close relationship with SoFiE. The

Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...

has been awarded for significant contribution to financial econometrics; in 2003 to Robert F. Engle "for methods of analyzing economic time series with time-varying volatility" and

Clive Granger Sir Clive William John Granger (; 4 September 1934 – 27 May 2009) was a British econometrician known for his contributions to nonlinear time series analysis. He taught in Britain, at the University of Nottingham and in the United States, at t ...

"for methods of analyzing economic time series with common trends" and in 2013 to

Eugene Fama Eugene Francis "Gene" Fama (; born February 14, 1939) is an American economist, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis. He is currently Robert R. McCormick Distinguished Servic ...

Lars Peter Hansen Lars Peter Hansen (born 26 October 1952 in Urbana, Illinois) is an American economist. He is the David Rockefeller Distinguished Service Professor in Economics, Statistics, and the Booth School of Business, at the University of Chicago and a ...

and Robert J. Shiller "for their empirical analysis of asset prices". Other highly influential researchers include Torben G. Andersen, Tim Bollerslev and

Neil Shephard Neil Shephard (born 8 October 1964), British Academy, FBA, is an econometrician, currently Frank B. Baird Jr., Professor of Science in the Department of Economics and the Department of Statistics at Harvard University. His most well known c ...

References

{{Reflist Econometrics Mathematical finance Financial economics Financial data analysis