Empirical Methods in Finance (Midterm) - Summary - Tilburg university - MSc Finance
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Course
Empirical Methods in Finance
Institution
Tilburg University (UVT)
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Summary for the course 'Empirical Methods in Finance'. This summary was written in order to study for the midterm. Everything you need to know is available in this summary.
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, Lecture 1 – Introduction
Financial econometrics:
Financial econometrics: application of statistical techniques to problems in finance
→ Testing theories, forecasting future values, determining relationship between financial
variables.
Steps for financial econometrics:
1. Have a clear question of interest.
2. Construct a model.
→ Mathematical equation that describes relation between x and y.
3. Find data for the variables necessary.
4. Turn model into an econometric model (specifying form of function)
→ y = α + βx + µ
Types of data:
1. Cross-sectional data:
- Data collected at a single point in time.
- Example: different CEO’s salary measured at one point in time, e.g., 2010.
2. Time series data:
- Data collected at many points in time.
- Example: weekly %-return of SP500 between 2000 and 2005
3. Panel data:
- Time series of a cross-sectional dataset (=multiple fixed points in time over time)
- Example: housing prices of different towns and their population respectively in US in
1980 and 1990.
Main difference time series and panel data:
- In time series data there is only one ‘i’ so for example only Mexico or only Germany.
- In panel data there are many ‘i’, so for example Mexico, Germany and Belgium.
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