Applications of state space models in finance

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Acknowledgements I sincerely thank my advisor, Professor Walter Zucchini, for the encouragement and the academic support he provided to me as an external doctoral student over the last few years. Besides, I am grateful to Professor Jörg Breitung for supervising my work on time-varying sector betas and for allowing me to participate in his econometrics course at the Bonn Graduate School of Economics during the winter semester 2004–2005. I am indebted to both of them for their commitment, their helpful comments and the many valuable suggestions they made in the insightful discussions we had. Thanks to my former colleagues at Generali Investments, Cologne, where I spent the first three years of my doctoral project. After my first year as a fund manager in the equity department, the idea of getting some more academic work done arose. I am especially thankful to Michael Fuchs for his belief in me, to Dr. Stephan Stockert and the management board for creating a framework that enabled me to work on the thesis and on equity strategy at the same time, and to my friend Heinz-Josef Stenten who has always been there for some thoughts away from econometrics. I also appreciate the support provided by Quoniam Asset Management during completion phase of the project. Many thanks go to Dr. Jan Bulla for his contribution of the code to conduct the computations related to hidden Markov models, for answering all my LaTeX-related questions and for reading the final manuscript. I would like to thank my family and all my friends for their support and their patience with me. My special thanks go to Levent and Alper Özkurt for giving me shelter during my numerous stays in Göttingen. I am indebted to my mom for allowing me to follow this route and for always being there. Finally, my heart goes to my wife, Leyla, who convinced me that there is no alternative to starting this project, and who has always kept faith in me. I very much enjoyed our discussions on conceptual issues and her ingenious contributions on how to move forward methodologically. Without her love and inspiration, her continuous support and dedication, it would not have been possible for me to get this thesis together. Frankfurt am Main, November 2009
Page 1: Sascha Mergner Applications of Stat
Page 4 and 5: erschienen im Universitätsverlag G
Page 6 and 7: Bibliographische Information der De
Page 9 and 10: Contents List of figures . . . . .
Page 11 and 12: Contents ix 4.5 Model selection and
Page 13: Contents xi 7.5 Concluding remarks
Page 16 and 17: xiv List of figures 6.14 Histograms
Page 19: Notation and conventions The outlin
Page 22 and 23: xx Used abbreviations and symbols L
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Page 29: Preface The work on this book began
Page 34 and 35: 2 1 Introduction sensitivities in f
Page 36 and 37: 4 1 Introduction missing. Chapter 6
Page 39 and 40: Chapter 2 Some stylized facts of we
Page 41 and 42: 2.1 The data 9 Table 2.1: The DJ St
Page 43 and 44: 2.2 Empirical properties 11 p t R t
Page 45 and 46: 2.2 Empirical properties 13 2.2.2 V
Page 47 and 48: 2.3 Implications 15 CUSUMSQ test 1.
Page 49 and 50: Chapter 3 Linear Gaussian state spa
Page 51 and 52: 3.2 The state space form of a dynam
Page 53 and 54: 3.3 The Kalman filter and smoother
Page 59 and 60: 3.4 Maximum likelihood estimation 2
Page 65 and 66: 3.5 Introduction of explanatory var
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48 4 Markov regime switching While
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50 4 Markov regime switching 4.3.1
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52 4 Markov regime switching Taking
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54 4 Markov regime switching such t
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56 4 Markov regime switching 4.5 Mo
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58 5 Conditional heteroskedasticity
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Chapter 6 Time-varying market beta
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6.1 The unconditional beta in the C
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6.2 Modeling conditional betas 87 v
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6.2 Modeling conditional betas 89 T
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6.2 Modeling conditional betas 91 R
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6.2 Modeling conditional betas 95 c
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6.2 Modeling conditional betas 101
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6.3 Analysis of empirical results 1
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6.4 Concluding remarks 119 of 150 w
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6.4 Concluding remarks 121 be furth
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124 7 A Kalman filter based conditi
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156 Conclusion and outlook conditio
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158 Conclusion and outlook conduct
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160 Appendix A A.2 The consumption-
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162 Appendix A The APT, introduced
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164 Appendix B β t β t β t 2.0 1
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176 Appendix B cumulative return (%
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178 Appendix C Table C.1: Compariso
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180 Appendix C Table C.2: In-sample
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182 Appendix C Table C.4: Out-of-sa
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184 Appendix C Table C.6: Out-of-sa
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186 Appendix C Table C.7 — contin
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188 Appendix C Table C.7 — contin
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190 Appendix C Table C.9: Fama-MacB
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192 References Baum, L. E. and T. P
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194 References de Jong, P. (1991).
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196 References Giannopoulos, K. (19
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198 References Keim, D. B. and R. F
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200 References Pagan, A. R. (1996).
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202 References Wells, C. (1994). Va
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