Advanced applied quantitative methods in finance Essay

Advanced applied quantitative methods in finance - Essay Example Financial time series have features that are represented well by models with dynamic variances. In this part, we focus at modeling the financial time series of the Italian Stock market index as well as the Spanish stock market index. We thus intend to examine the volatility in the Italian Spanish markets by understanding the change in commodity prices over a period of time. Finally we aim to present the various processes through which financial decisions are taken by aid of volatility modeling. Uses regression to provide possible estimates of the disturbance variances at each sample point and the original relation is then re-estimated by the weighted least squares procedure that corrects for the heteroskedasticity. The data is a time series data that includes 4255 daily market index prices for the Italian stock market spanning over the period 12/31/1997-22/01/2014 we also have the Spanish stock market data that includes 7122 daily market index prices spanning from 1/5/1987 to 4/22/2014 The series are characterized by random, rapid changes and are said to be volatile. The volatility seems to change over time as well. There has been upward and downward effects in volatility for the Italian market while the time series plot for Spanish market shows somehow an upward increase with slight variations (decreases) in between the years. The variations in volatility could be as a result among other factors, political factors or the international market changes. The histograms of the empirical distribution of the series are given below. For both the two market indexes, we observe that the series are leptokurtic. That is, they have lots of observations around the average and a relatively large number of observations that are far from average; for the Italian market index, the centre of the histogram has a high peak and the tails