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Financial Modeling

Financial Modeling. Paul A. Spindt. Financial Models. Models are stylized representations Abstractions from reality Designed to capture essentials Goal of modeling is to achieve insight Not to replicate reality Desire to understand how elements fit together and interact.

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Financial Modeling

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  1. Financial Modeling Paul A. Spindt

  2. Financial Models • Models are stylized representations • Abstractions from reality • Designed to capture essentials • Goal of modeling is to achieve insight • Not to replicate reality • Desire to understand how elements fit together and interact.

  3. Assumptions and Outcomes • Assumptions • Identified variables • Independent variables • Dependent variables • Structural relationships among variables • Values and distributions of possible values • Outcomes • Dependent variables the model is designed to explain

  4. Model Types • Mathematical models • Highly abstract • Emphasis on structural relationships • Empirical models • More value-specific assumptions • Specific quantitative outcomes sought • Spreadsheet models • Codified empirical models

  5. Models in this class • Financial statement models • Pro forma projections • Valuation • Portfolio selection models • Mean variance efficiency • CAPM • Optimal portfolios • Option pricing models • Black-Scholes-Merton • Binomial

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