This subject is concerned with the econometric modeling of financial data and tests of some standard asset pricing models. We begin with a discussion of the key empirical characteristics of financial data. Next, we formulate tests of standard asset pricing models in the framework of the general linear regression model. We then move on to a discussion of time series methods for modeling stationary data. We are then in a position to model the volatility in financial data. We observe volatility, particularly, in the returns on financial assets over short (weekly or daily) holding periods. Our focus will be on the ARCH/GARCH class of volatility models and on estimating models of time-varying risk premia in the stock and bond markets. We then briefly discuss time series methods for modeling non-stationary data. This will allow us to model long-run relationships between financial time series. Finally, the subject concludes with a discussion of VAR models which allows us to investigate the dynamic interactions among multiple financial time series. Throughout the subject, the techniques will be demonstrated using actual financial data (that will be posted on the subject’s web-site). The econometric software is EViews, which is menu-driven and very easy to use. On completion of this subject students should be able to apply modern econometric methods to model financial data and to use these models to provide input into the financial decision making process
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