The paper documents the specification and estimation of an econometric model of the Brazilian stock market (Bovespa) using a GARCH(1,1) model. We used quarterly data for an estimation period spanning from January 1995 to December 2003. The empirical results show that GDP growth, exchange-rate...

There are three crucial mathematical system concepts in Finance, which are either being confused or misapplied - uncertainty, complexity and rank. First, the concept of epistemic uncertainty is sufficient for modeling and the concept of probability is unnecessary. This is illustrated by Galton's...

In recent years the application of kernel smoothing methods in nonparametric regression framework to financial time-series analysis has become widespread. Kernel smoothing methods have not been applied, however, to a wide range of problems arising in time-series simulations and forecasting....

The Chicago Mercantile Exchange introduced E-mini Samp;P 500 index futures in September 1997, and E-mini Nasdaq 100 index futures in June 1999. This paper empirically examines the effects from the introduction of the E-mini futures contracts on the market quality of the original Samp;P 500 and...

We develop a theory for option pricing with perfect hedging in an inefficient market model where the underlying price variations are autocorrelated over a time. This is accomplished by assuming that the underlying noise in the system is derived by an Ornstein-Uhlenbeck, rather than from a Wiener...

Financial market volatility is an important input for investment, option pricing and financial market regulation. In this review article, we compare the volatility forecasting findings in 72 papers published and written in the last decade. This article is written for general readers in...

The spread of crises from one country to another, named ldquo;contagionrdquo;, has been one of the most debated issues in international finance in the last two decades. The presence of contagion can be detected by the increase in conditional correlation during the crisis period compared to the...

This paper investigates the forecasting performance of three popular variants of the non-linear GARCH models, namely VS-GARCH, GJR-GARCH and Q-GARCH, with the symmetric GARCH(1,1) model as a benchmark. The application involves ten European stock price indexes. Forecasts produced by each...

I show that a congruent, parsimonious, encompassing model discovered using David Hendry's econometric modelling approach and Autometrics can overcome the many inadequacies of the typical static models of US Treasury returns regressed on macroeconomic announcements. The typical specification...

Classical quantitative finance models such as the Geometric Brownian Motion or its later extensions such as local or stochastic volatility models do not make sense when seen from a physics-based perspective, as they are all equivalent to a negative mass oscillator with a noise. This paper...