Quantitative methods for portfolio analysis. MTV model approach (Q1344908)

This book describes a variety of quantitative methods for financial asset allocation. It is written for quantitatively-inclined analysts (quants) in financial industries, financial engineers in investment banks, securities companies, derivative trading companies, software houses, etc., who are developing portfolio trading systems, advanced students and specialists in finance, business, economics, statistics, financial engineering, etc.. This book has 3 parts with 14 chapters with a lot of examples from the japanese financial markets. Part I with chapter 1-5 describes quantitative models for portfolio analysis. Part II (ch. 6-11) regards quantitative asset allocation systems, followed by part III (ch. 12-14) with a statistical approach to option pricing and bond pricing. The relationship between the approach of the author and modern portfolio theory is discussed in chapter 1 (quantitative approach to asset allocation) of part I. After the aim of the book to provide practical useful models and methods for quantitative analysts, the demand for variability and for quants portfolio construction systems is regarded followed by the description of modern portfolio theory and quants. Chapter 2 (empirical features of financial returns) begins with an introduction and stationary time series followed by random walk and nonnormality. Then nonindependant and nonlinear features are regarded. Chapter 3 (univariate financial time series models) begins with modelling financial time series, regards then stationarity, trend and return, the Taylor and Arch model. Some nonlinear (bilinear, threshold autoregressive, smoothing transition autoregressive) models follow. In chapter 4 multivariate financial time series models are treated. It discusses multifactor models, reviews some basic multivariate time series models, and describes a state space approach and a Kalman Filter model. It ends with some special multifactor models. Chapter 5 (multivariate time series variance component (MTV) model and its application) describes the theoretical foundation of the MTV model behind the introduction. It follows the use of the MTV model and estimation. A strucrural analysis of the variations of Yen/Dollar exchange rates is made via the MTV model. Electronic-related stock prices are predicted. Part II begins with quantitative portfolio construction procedures in chapter 6. A comprehensive asset allocation is described followed by basic notations and a concept. Further it treats Markowitz theory and its implications followed by the mathematical structure of asset allocation. Chapter 7 regards multifactor models and their applications. After an introduction the capital asset pricing model (CAPM) is described. It follows the arbitrage pricing theory (APT), two multifactor models in Japan, and a regression -- MTV model with some applications. Chapter 8 describes Rosenberg models and their applications. First a market model portfolio is discussed. It follows time-varying coefficient models. Then future returns and risk are predicted followed by a model in Japan and a convergent parameter model. Chapter 9 (selection of portfolio population) begins with an introduction to the problem, information coefficients (IC) for selection of a portfolio population, and a classification procedure for the determination of such a portfolio. It ends with a robust classification analysis procedure for such a portfolio. Chapter 10 treats an optimal MTV market portfolio (MTV-MP). First it describes the MTV-MP system. Then common market components are extracted and a target population is selected. After this the optimal MTV portfolio is described. Then, the prediction error in a MTV model ist regarded. Chapter 11 regards an index portfolio and a canonical correlation portfolio. It begins with the basic concept of the index portfolio, continues with the MTV index portfolio (selection and construction), and cluster analysis for grouping. Then an index plus \(\alpha\) premium minus \(\beta\) risk historical portfolio is regarded followed by a canonical correlation portfolio. Part III begins with the Black-Scholes option theory and its applications in chapter 12. After the introduction of the basic concepts as the definition of European put and call options the Black-Scholes option pricing formula follows. Then some basic formulae for option portfolios are derived. A portfolio insurance and an estimation of volatilities follow. Chapter 13 (practical option pricing and related topics) treats the practical option pricing, the Gram-Charliar option pricing, practical option pricing under Taylor model and under Arch model, fractional Brownian motion and option pricing, and Asian options. Chapter 14 discusses statistical bond pricing models. After an introduction the basic structure of bond analysis is described. It follows the discussion of a market spot rate function and a market spot rate function of zero coupon bonds. Then a statistical model for market discount function of coupon bonds are treated by a discussion of the prediction of a market discount function and the duration in the statistical models.