[R-SIG-Finance] Financial Econometrics

John Frain frainj at tcd.ie
Tue Sep 16 16:30:13 CEST 2008

It does really depend on the prior
mathematical/statistical/econometric knowledge of your students.  If
it is really advanced econometrics then you might look at Hayashi or
Green or Hendry.   I would think of three possible divisions in

1) macroeconometrics
2) microeconometrics
3) financial econometrics.

All three are based, to a large extent, on variations and
generalisations of the linear model and have a considerable overlap.

Macroeconometrics can be divided into two groups - structural
econometrics and what I might call atheoretical  econometrics which
includes ARMA GARCH Var and similar models.  ( I know that  some of
these models can include structural features).   Many structural
models include temporal dependencies which require time-series
methods.   What is important is that one understands that pure
time-series methods can only be used for forecasting.  Structural
methods are required for policy evaluation.  Generally samples size is
small and economic theory has a very important input.   Many
economists do not understand this point.

Microeconometrics usually involves the analysis of larger
cross-sections or panels of data.  As a cross-section is a picture of
a large numer of units taken at one time there is no temporal
dependence in the data.  As the sample size can be very big asymptotic
theory is generally sufficient.   In panel data the number of units is
very large relative to the number of time periods and most of the
asymptotic theory is in terms of the number of units.  There is a
limited amount of theory dealing with temporal dependence.  Standard
references include Wooldridge or Cameron and Trivedi.  Applications in
finance include credit rating and evaluation of new products.

Financial econometrics is more like the atheoretical macroeconometrics
with large samples.  One is generally concerned with forecasting
returns, variances and correlations for input to various procedures.
The emphasis here is slightly different.

At a more elementary level you might have a look at Heij, De Boer,
Frances, Kloek and van Dijk(2004), Econometric methods with
Applications in Business and Economics,Oxford or Brooks (2008),
Introductory Econometrics for Finance, Cambridge.  Both have a lot of
applied examples which you might find useful.

I have looked a the R library for 'Applied Econometrics with R' by
Christian Kleiber and Achim Zeileis and have ordered it from Amazon in
America as it is marked not available yet in Europe.  It looks very
interesting.  I have not mentioned the classic intermediate books  by
Maddala, Baltagi, Berndt, Dinaro and Johnson,  etc.  Any of these
might be worth considering.  It is important that one has a clear view
of the capabilities of the class and of the aims of the course.

Best Regards


2008/9/16 Shane Conway <shane.conway at gmail.com>:
> I recommend:
> * Kennedy: "A Guide to Econometrics"
> * Greene: "Econometric Analysis"
> ------------------------------
> Thanks, and are these book about traditional econometrics or time series?
> Maybe it's just a illusion to find some econometrics on finance without ts...
> HC
>> -----Original Message-----
>> From: markleeds at verizon.net [mailto:markleeds at verizon.net]
>> Sent: Monday, September 15, 2008 10:57 PM
>> To: Hsiao-nan Cheung
>> Subject: RE: [R-SIG-Finance] Financial Econometrics
>> authors of texts  are below but i don't know the text names off the top
>> of my head.
>> tsay
>> zivot and wang
>> hayashi
>> mckinlay & lo
>> gueriorox and monfort
>> stephen taylor  ( out of print )
>> On Mon, Sep 15, 2008 at 10:03 AM, Hsiao-nan Cheung wrote:
>> > Hi,
>> >
>> >
>> > I��ll be a assistant professor on econometrics in the following term.
>> > Since
>> > the students are mainly of dept. of finance, my professor want the
>> > teaching
>> > materials be about finance and not about macroeconomics. Is there any
>> > good
>> > books about financial econometrics (not something about time series
>> > analysis)? Something by examples is the best.
>> >
>> >
>> > Thanks
>> >
>> >
>> > Hsiao-nan Cheung
>> >
>> >
>> >
>> >
>> >     [[alternative HTML version deleted]]
>> >
>> >
>> >
>> >      ------------------------------
>> >
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John C Frain
Trinity College Dublin
Dublin 2
mailto:frainj at tcd.ie
mailto:frainj at gmail.com

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