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Overview of Quantitative Finance and Risk Management Research By Dr. Cheng-Few Lee Distinguished Professor, Rutgers University, USA Distinguished Professor, National Chiao Tung University, Taiwan Editor, Review of Quantitative Finance and Accounting Editor, Review of Pacific Basin Financial Markets and Policies

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Overview of Quantitative Finance and Risk Management Research Abstract Based upon theoretical framework of finance, policy framework of finance, and research methods of quantitative finance and risk management, this paper will reviews, and discusses the overview of i) portfolio theory and investment analysis, ii) options and option pricing theory, and iii) risk management. In addition, research topics in quantitative finance and risk management will be suggested.

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Overview of Quantitative Finance and Risk Management Research Chapter A.Theoretical Framework of Finance Chapter A.Theoretical Framework of Finance Chapter B. Investment, Dividend, Financing, and Production Policies: Theory and Implications Chapter B. Investment, Dividend, Financing, and Production Policies: Theory and Implications Chapter C. Research Methods in Quantitative Finance and Risk Management Chapter C. Research Methods in Quantitative Finance and Risk Management

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Chapter A. Theoretical Framework of Finance A.1 INTRODUCTION A.2 DISCOUNTED CASH-FLOW VALUATION THEORY BOND VALUATION Perpetuity Term Bonds COMMON-STOCK VALUATION A.3 M AND M VALUATION THEORY Review and Extension of M and M Proposition I Miller s Proposition on Debt and Taxes A.4 Markowitz Portfolio Theory A.5 CAPITAL ASSET PRICING MODEL (CAPM) A.6 Arbitrage Pricing Theory Ross s Arbitrage Model Specification

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Chapter A. Theoretical Framework of Finance A.7 OPTION VALUATION A.8 Futures Valuation and Hedging FUTURES MARKETS: OVERVIEW THE VALUATION OF FUTURES CONTRACTS The Arbitrage Argument Interest Costs Carrying Costs Supply and Demand Effects The Effect of Hedging Demand HEDGING CONCEPTS AND STRATEGIES Hedging Risks and Costs The Johnson Minimum-Variance Hedge Strategy The Howard-D Antonio Optimal Risk-Return Hedge Strategy A.9 CONCLUSION

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Chapter B. Investment, Dividend, Financing, and Production Policies: Theory and Implications B.1 INTRODUCTION B.2 INVESTMENT AND DIVIDEND INTERACTIONS: THE INTERNAL-VERSUS- EXTERNAL FINANCING DECISION Internal Financing External Financing B.3 INTERACTIONS BETWEEN DIVIDEND AND FINANCING POLICIES Cost of Equity Capital and Dividend Policy 1 Default Risk and Dividend Policy B.4 INTERACTIONS BETWEEN FINANCING AND INVESTMENT DECISIONS Risk-free Debt Case Risky Debt Case B.5 IMPLICATIONS OF FINANCING AND INVESTMENT INTERACTIONS FOR CAPITAL BUDGETING Equity-Residual Method After-Tax, Weighted-Average, Cost-of-Capital Method The Arditti-Levy method is most similar to the after-tax weighted-average cost-of-capital Arditti and Levy Method Myers Adjusted-Present-Value Method

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Chapter B. Investment, Dividend, Financing, and Production Policies: Theory and Implications B.6 IMPLICATIONS OF DIFFERENT POLICIES ON THE BETA COEFFICIENT Impact of Financing Policy on Beta Coefficient Determination Impact of Production Policy on Beta Coefficient Determination Impact of Dividend Policy on Beta Coefficient Determination B.7 CONCLUSION Appendix I. STOCHASTIC DOMINANCE AND ITS APPLICATIONS TO CAPITAL-STRUCTURE ANALYSIS WITH DEFAULT RISK I.1 INTRODUCTION I.2 CONCEPTS AND THEOREMS OF STOCHASTIC DOMINANCE I.3 STOCHASTIC-DOMINANCE APPROACH TO INVESTIGATING THE CAPITAL-STRUCTURE PROBLEM WITH DEFAULT RISK I.4 SUMMARY

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Chapter C. Research Methods in Quantitative Finance and Risk Management C.1 Introduction C.2 Statistics Binomial distribution Multinomial distribution Normal distribution Log-normal distribution Non-central Chi-square distribution Factor analysis Discriminant analysis Bayesian inference Stochastic dominance Characteristics function Spectrum analysis

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Chapter C. Research Methods in Quantitative Finance and Risk Management C.3 Econometrics Linear regression models Time series modeling Multiple equations models Generalized methods of moments Panel data models ARM model GARCH analyses Defensive forecasting Spline-GARCH Dynamic econometric loss Robust logistic regression

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Chapter C. Research Methods in Quantitative Finance and Risk Management C.4 Mathematics Equilibrium analysis Optimization problems Dynamic analysis Itô calculus Ordinary differential equation (ODE) Fuzzy set theory C.5 Other Disciplines Operation research Monte Carlo Markov Chain (MCMC) method Entropy theory Computer Science and Technology C.6 Conclusion

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FIN 614: Financial Management Larry Schrenk, Instructor.

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