STATISTICAL

METHODS IN FINANCE

FLOW CHART OF THE PROCESS

STATISTICAL METHODS IN FINANCE

FLOW CHART OF THE PROCESS

THE PROCESS UNDERTAKEN

STATIONARY Mean(Test for mean 0) Variance(Take log dierence) ADF test for StaEonarity.
MODEL ESTIMATION ARIMA, GARCH.

FORECASTING

2
MODEL IDENTIFICATION ACF, PACF plot

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MODEL ADEQUACY Box Test for serial correlaEon.

STATISTICAL METHODS IN FINANCE

closing
Last 14.14

Mean Zero

[20070103/20120706]

80

T test shows mean not zero of the closing prices. p-value <2.2e-16 alternaEve hypothesis: true mean is greater than 0 Since the mean is not zero, we dierence the data.

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Jan 03 2007

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Jan 03 2012

STATISTICAL METHODS IN FINANCE

ADF TEST : Sta@onarity

dtest
Last 0.0199999999999996

The augmented DickeyFuller (ADF) staEsEc, used in the test, is a negaEve number. The more negaEve it is, the stronger the rejecEon of the hypothesis that there is a unit root at some level of condence. Dickey-Fuller = -12.2629, Lag order = 11, p-value = 0.01 alternaEve hypothesis: staEonary Conclusion: Since p value<0.05, reject null of non staEonarity, therefore data is staEonary A model that includes a constant and a Eme trend is esEmated using sample of 50 observaEons and yields the staEsEc of 4.57. This is more negaEve than the tabulated criEcal value of 3.50, so at the 95 per cent level the null hypothesis of a unit root will be rejected.

[20070104/20120706]

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Jan 04 2007

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STATISTICAL METHODS IN FINANCE

NORMALITY TEST

Jarque - Bera Normalality Test Test Results: X-squared: 58437.3676, P VALUE: < 2.2e-16 the JarqueBera test is a goodness-of-t test of whether sample data have the skewness and kurtosis matching a normal distribuEon. The null hypothesis is a joint hypothesis of the skewness being zero and the excess kurtosis being zero. Hence, we conclude that the data does not have a normal distribu@on.

Basic STATS MS.Close nobs 1385.000000 NAs 0.000000 Mean -0.001226 Variance 0.002144 Stdev 0.046308 Skewness 1.393276 Kurtosis 31.649301 Gaussianity refers to the probability distribu@on with respect to the value, in this context the probability of the signal reaching an amplitude, while the term 'white' refers to the way the signal power is distributed over @me or among frequencies.

STATISTICAL METHODS IN FINANCE

MODEL IDENTIFICATION

SAMPLE ACF INTERPRETATIONS

STATISTICAL METHODS IN FINANCE

ACF, PACF PLOT

Series: y
1.0 0.2 0.0 0.2 ACF 0.4 0.6 0.8

0.2

There is no clear indicaEon of a AR(p) or MA(q) process here, as neither the ACF nor the PACF has a gradual decline at consecuEve lags nor do they have spikes at certain lags. Second method of p,q es@ma@on. best.order<-c(0,0,0) best.aic<-Inf for(i in 0:4)for(j in 0:3){ t.aic<-AIC(arima(resid(arma) ,order=c(i,0,j))) if(t.aic<best.aic){ best.order<-c(i,0,j) best.arma<-arima(resid(arma1) ,order=best.order) best.aic<-t.aic}}

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PACF 0.4

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STATISTICAL METHODS IN FINANCE ARIMA(1,0,1), AIC= -5.141276 ARIMA(3,0,1), AIC= -5.165905 Box-Ljung test (H 0 : The data are independently distributed) X-squared = 41.8899, df = 12, p-value = 3.476e-05 Since p<0.05, we reject the null and say data is dependent. Here an ARIMA p=1,3 and q=1 with d=0(as data is staEonary) has been med to the data without indicaEons of removal of serial correlaEons between the square of residuals. We nd a relaEon between the variance of the residuals signifying that the data was not totally characterized by the ARIMA models used here and more analysis is needed to get a white noise in the end.
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Fi\ng ARMA
Series: armaresi4^2

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ACF 0.4 0.6

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STATISTICAL METHODS IN FINANCE G6-ARMA(3,1)+GARCH(1,1) AIC=-4.134697 G8-ARMA(1,1)+GARCH(1,1) AIC=-4.132427 Box-Ljung test X-squared = 30.7012, df = 12, p-value = 0.002188 Box-Ljung test X-squared = 47.8836, df = 12, p-value = 3.275e-06 The Error analysis for G6 showed insignicact presence of AR 2 and 3 and the model could only be characterised by ARMA(1,1) + Garch(1,1), but G6 had a bemer AIC value and both G6 and G8 did not remove the serial correlaEon between the residuals. The QQ plot shows that the residuals are sEll not normal and the ACF and Ljung-Box test of residual squared shows that there is serial correlaEon between them. Therefore, the models are not complete.

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FITTING GARCH Time

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ACF of Residuals

Normal QQ Plot of Std Residuals

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Sample Quantiles

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ACF

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Theoretical Quantiles

p values for LjungBox statistic

1.0 p value 0.4 0.6 0.8

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STATISTICAL METHODS IN FINANCE

COMPARISON BETWEEN DIFFERENT MODELS

GARCH(1,1), ARMA(3,1)+GARCH(1,1), ARMA(3,1)+GARCH(1,1), ARMA(3,1)+GARCH(1,1), t normal t skewed t AIC Ar1 ar2 ar3 ma1 alpha beta -4.134258 0 0 0 0 0.13389 0.85514 -4.040692 0.55364 0.01263 -0.069487 -0.58672 0.13272 0.85570 -4.134697 0.7038 0.01662 -0.04825 -0.7336 0.1189 0.8843 -4.133303 0.70338 0.16594 -0.48111 -0.73270 0.12188 0.88402

STATISTICAL METHODS IN FINANCE

FINAL GARCH MODEL

Rt t ht

= 0.703Rt1 + t 0.7336t1 = ht t with = 0.1189t1 + 0.8843ht

Where, should be WN(0,1). But since our GARCH does not capture all the characteris@cs of the model it is not in this case.