Suleman Dawood School of Business Lahore University of Management Sciences

FINN 421 Financial Time Series Analysis

Dr Ali K. Malik Office: 164, Ext.: 8039 E-mail: alikmalik@lums.edu.pk Course Description

This course provides an in depth discussion of some of the most frequently used time series techniques in finance (financial economics, financial econometrics and financial mathematics) and their applications in finance. The course will be useful to students who intend to pursue a graduate degree in finance or economics and to those who want to seek a career in research related sectors (investment banking etc.).

The course provides a rigorous introduction to time series econometrics which is frequently used in advanced asset pricing, the study of ‘financial assets’ and the ‘capital markets’ in which they are traded. The course is intended for undergraduates with a good mathematical background and an appetite for technical econometric analysis of financial data.

The course consists of topics on time series analysis. The core content of the course include time series modeling, ARMA/ARIMA models, autocorrelation functions, unit root tests, VAR analysis, cointegration, error-correction models, volatility models, regime switching models, principal of component analysis, multivariate volatility models, state-space models etc. and their related applications in finance. These techniques will be discussed in depth in the course and an even greater emphasis will be on the practical applications of these techniques. Most of the techniques will be applied to real world financial data.

Office Hours

Unless announced otherwise, I will be available in my office from 12-4pm every Wednesday. In addition, I normally have an open door policy. Feel free to drop in if the door is open and if I am not talking with someone else or on the phone.

Assessment

Exam 45%Mid-Term Exam 25%Assignments 25%Class Participation 5%

Please note that a record for attendance will also be kept. The CP grade will be considerably reduced if you regularly miss lectures. For every lecture you miss, without the prior consent of the instructor, you will be awarded a negative mark. If you end up missing 5 lectures, you will get zero in the CP, but for every additional absent the negative balance will be carried over to your remaining instruments i.e. your grade in some other instrument(s) will be reduced.

Please Note: Assignments will require the use of econometric software for performing data analysis. ‘Stata’ is the recommended software. The course may however utilize ‘Matlab’ and ‘R’ software as well. Students will be provided help on using software in the form of tutorials and handouts. Students will normally get a week for completing the assignment. No late assignments will be accepted.

Books

The textbook for the course is

Ruey S. Tsay, Analysis of Financial Time Series, 2nd ed. 2005, Wiley.

There are some other good textbooks available which cover the course topics as well. A few good references are:

Walter Enders, Applied Econometrics Time Series, 2nd ed. 2004, Wiley

Francis X. Diebold, Elements of Forecasting, 2nd ed. 2001, South-Western

Jack Johnston, John Dinardo, Econometric Methods, 4th ed. 1997, Irwin. [The book has some good sections on Time Series Econometrics]

C. Gourieroux, J. Jasiak, Financial Econometrics, 2005, Princeton University Press. [This is a graduate level textbook, but some sections are quite accessible to the undergraduate level students.]

John Y. Campbell, Andrew W. Lo, A. Craig Mackinlay, The Econometrics of Financial Markets, 1997, Princeton, University Press. [This is another (leading) graduate level textbook]

In addition the course may utilize some journal articles as part of the assigned readings. Most of these articles (particularly those from the Journal of Economic Perspectives) are accessible introductions to a topic.

Note: If you find the recommended texts a bit hard to digest at the beginning of the course, you can actually go through some of the good undergraduate level econometrics text-books to enhance your understanding, e.g. Gujarati, Basic Econometrics, Wooldridge, Introductory Econometrics, Stock and Watson, Introduction to Econometrics, etc... These text-books have some good introductory chapters on time series econometrics.

Course Outline

Univariate Time Series Analysis

Financial Time Series and Their Properties

Tsay: Chapter 1

AR/MA/ARMA/ARIMA Models

Tsay: Chapter 2

Random Walk, Unit-Root Tests and Long-Memory Models

Tsay: Chapter 2

Volatility Modeling (ARCH/GARCH/EGARCH/Stochastic Volatility Models)

Tsay: Chapter 3

Multivariate Time Series Analysis

Vector Autoregressive Models

Tsay: Chapter 8

Cointegration and Vector Error Correction Models

Tsay: Chapter 8

Principal Component Analysis and Factor Models

Tsay: Chapter 9

Multivariate Volatility Models (Multivariate GARCH Models and Multivariate Stochastic Volatility Models)

Tsay: Chapter 10

Uni- & Multi-variate Time Series Analysis

Extreme Values, Quantile Estimation & Regression, Extreme Value Theory

Tsay: Chapter 7

High Frequency Data Analysis

Tsay: Chapter 5

Regime-Switching Models

Tsay: Chapter 4

State-Space Models and Kalman Filter

Tsay: Chapter 11

Markov Chain Monte Carlo Methods (depending on time availability)

Tsay: Chapter 12

Generalized Method of Moments (depending on time availability)

Financial Applications of all the topics will be discussed in the lectures. The book contains numerous applications of these techniques in finance.

Note: Students will be informed about the relevant sections of the chapters in the lectures or via e-mail i.e. the required reading.