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Handbook of Quantitative Finance and Risk Management






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Handbook of Quantitative Finance and Risk Management. Edited by Cheng-Few Lee Rutgers University Alice C. Lee San Francisco State University. This handbook expects to be published by Springer by January 2009. Please send all comments and suggestions to C.F. Lee at lee@rbsmail.rutgers.edu.
Handbook of Quantitative Finance and Risk Management

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Handbook of Quantitative Finance and Risk Management

Edited by

Cheng-Few Lee

Rutgers University

Alice C. Lee

San Francisco State University

This handbook expects to be published by Springer by January 2009. Please send all comments and suggestions to C.F. Lee at lee@rbsmail.rutgers.edu

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Table of Contents for Handbook of Quantitative Finance and Risk Management

PREFACE

List of Contributors

Part I – Introduction

Part II – Essays

Chapter 1 Theoretical Framework of Finance

1) Classical Theory

2) New classical theory

3) CAPM and APT

4) Options and Futures Theory

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Part II – Essays

Chapter 2 Policy Framework of Finance

1) Investment Policy

2) Financial Policy

3) Dividend Policy

4) Production Policy

Chapter 3 Research Methods of Quantitative Finance and Risk Management

1) Statistics 2) Econometrics

3) Mathematics 4) Operation research

5) Stochastic process 6) Computer science and technology

7) Entropy 8) Fuzzy set Theory

9) Other Methods

Chapter 4 Overview of Quantitative Finance and Risk Management Research

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Part III –Portfolio Analysis

Chapter 1 Basic Concepts of Portfolio Analysis

Chapter 2 Markowitz Portfolio-Selection Model

Chapter 3 Capital Asset Pricing Model and Beta Forecasting

Chapter 4 Index Model for Portfolio Selection

Chapter 5 Performance-Measure Approaches for Selecting Optimum Portfolios

Part IV – Options and Futures

A. Basic Concepts and Strategies

Chapter 1 Introduction

Chapter 2 Options and Option Strategy

2.1 The Option Market and Related Definition

2.1 .1 What Is an Option?

2.1 .2 Types of Options and Their Characteristics

2.1 .3 Relationships Between the Option Price and the Underlying Asset

Price

2.1 .4 Additional Definitions and Distinguishing Features

2.1 .5 Types of Underlying Asset

2.1 .6 Institutional Characteristics

2.2 Index and Futures Options

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Table of Contents for Handbook of Quantitative Finance and Risk Management

2.3 Put-Call Parity

2.3.1 European Options

2.3.2 American Options

2.3.3 Futures Options

2.3.4 Market Applications

2.4 Risk-Return Characteristics of Options

2.4.1 Long Call

2.4.2 Short Call

2.4.3 Long Put

2.4.4 Short Put

2.4.5 Long Straddle

2.4.6 Short Straddle

2.4.7 Long Vertical (Butt) Spread

2.4.8 Short Vertical (Butt) Spread

2.4.9 Calender (time) Spreads

2.5 Summary

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Table of Contents for Handbook of Quantitative Finance and Risk Management

B. Statistical Analysis Approaches

Chapter 3 Binomial Option Pricing Models

3.1 Introduction

3.2 Some Properties of the Binomial Distribution

3.3 Some Properties of the Normal Distribution

3.4 The Binomial Option Pricing of Cox, Ross and Rubinstein

3.4.1 Derivation of the Option Pricing Model

3.4.2 The Black and Scholes Model as a Limiting Case

3.5 The Binomial Option Pricing of Rendleman and Barter

3.5.1 Derivation of the Option Pricing Model

3.5.2 The Black and Scholes Model as a Limiting Case

Chapter 4 Multinomial Option Pricing Model

4.1 Introduction

4.2 Multinomial Option Pricing Model

4.2.1 Derivation of the Option Pricing Model

4.2.2 The Black and Scholes Model as a Limiting Case

4.3 A Lattice Framework for Option Pricing

4.3.1 Modification of the Two State Approach for a Single State

Variable

4.3.2 A Lattice Model for Valuation of Options on Two Underlying Assets

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 5 The Lognormal Option Pricing Model

5.1 Introduction

5.2 The Lognormal Distribution

5.2.1 Some Properties of the Lognormal Distribution

5.2.2 The Lognormal Distribution and Its Relationship

to the Normal Distribution

5.2.3 Derivation of the Black and Scholes Option

Pricing Model

5.3 Limitations of The Lognormal Option Pricing Model

Chapter 6 Bivariate Normal Option Pricing Models

6.1 Introduction

6.2 European Options versus American Options

6.3 The Bivariate Normal Option Pricing Models

6.4 Examples

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Table of Contents for Handbook of Quantitative Finance and Risk Management

C. Stochastic Calculus Approaches

Chapter 7 Ito Calculus and The Black and Scholes Option Pricing Model

7.1 Introduction

7.2 Review of Stochastic Processes

7.3 Review of Ito Calculus

7.4 Ito Calculus Approach to The Black and Scholes Options Pricing

Model

7.4.1 Derivation of the Black and Scholes Option Pricing Model

7.4.2 Limitations of the Black and Scholes Option Pricing Model

Chapter 8 Constant Elasticity of Variance (CEV) Option Pricing Model

8.1 Introduction

8.2 Review of Noncentral x2 Distribution

8.3 Noncentral x2 Approach to Option Pricing Models

8.3.1 Derivation of the Probability Density Function under CEV

8.3.2 The Option Pricing Model under CEV

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 9 Stochastic Volatility Option Pricing Model

9.1 Introduction

9.2 Review of Characteristic Function

9.3 Nonclosed-Form type of Option Pricing Model

9.4 Closed-Form type of Option Pricing Model

Chapter 10 A General Option Pricing Model

10.1 Introduction

10.2 The Jump Diffusion Model

10.3 Option Pricing Model with Random Variance and

Interest Rate

10.4 Stochastic Volatility, Interest Rates, and Jumps

Option Pricing Model

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Table of Contents for Handbook of Quantitative Finance and Risk Management

D. Applications

Chapter 11 Option Valuation and Hedging

11.1 Introduction

11.2 The Hedge Ratio

11.3 The Sensitivities of the Black-Scholes OPM to the Inputs

11.4 Option Elasticity and Beta

11.5 Estimating the Inputs

11.6 Extensions of the Black-Scholes OPM

11.7 Pricing Other Financial Securities Using Option Pricing Theory

11.8 Evaluating the Black-Scholes Option-Pricing Model

11.9 Estimating the Implied Standard Deviation with OLS

Chapter 12 Foreign Exchange Option Pricing Models

12.1 Introduction

12.2 Derivation of Foreign Exchange Option Pricing Models

12.2.1 Option on Foreign Exchange

12.2.2 Options on Foreign Exchange Futures

12.3 Applications of Foreign Exchange Option Pricing Models

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 13 Index Option Pricing Models

13.1 Introduction

13.2 Derivation of Index Option Pricing Models

13.2.1 Option on Index

13.2.2 Option on Index Futures

13.3 Applications of Index Option Pricing Models

Chapter 14 Real Options

14.1 Introduction

14.2 Traditional Approaches of Capital Budgeting Under Uncertainty

14.2.1 Statistical Distribution Approach

14.2.2 Decision Tree Approach

14.2.3 Certainty Equivalence Approach

14.3 Real Option Approach to Capital Budgeting Decisions

14.3.1 Venture Capital Investment Decision

14.3.2 New Product Investment Decision

14.4 Real Option Pricing Models

14.4.1 Univariate Normal Model

14.4.2 Bivariate Normal Model

14.4.3 Multivariate Normal Model

Chapter 15 Option Pricing Model and Risk Management

Chapter 16 Summary and Concluding Remarks

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Part V – Contributed Papers

Chapter 1: The Creation and Control of Speculative Bubbles in a Laboratory Setting

James S. Ang, Florida State University, USA

Dean Diavatopoulous, Florida State University, USA

Thomas V. Schwarz, Grand Valley State University, USA

Chapter 2: Business Models: Applications to Capital Budgeting, Equity Value and Return Attribution

Thomas S. Y. Ho

Sang Bin Lee, Hanyang University, Korea

Chapter 3: Risk and Valuation Under an Intertemporal Capital Asset Pricing Models

Michael J. Brennan, Anderson School, USA

Yihong Xia, Pennsylvania University, USA

Chapter 4: Portfolio Optimization Models and Mean-Variance Spanning Tests

Wei-Peng Chen, Shih Hsin University, Taiwan

Huimin Chung, National Chiao Tung University, Taiwan

Keng-Yu Ho, National Central University, Taiwan

Tsui-Ling Hseu, National Chiao Tung University, Taiwan

Chapter 5: A Further Analysis of Convergence Rate and Pattern of the Binomial Models

San-Lin Chung, National Taiwan University, Taiwan

Pai-Ta Shih, National Dong Hwa University, Taiwan

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 6: Combining Fundamental Measures for Stock Selection: Some Thoughts

Kenton K. Yee, Columbia Business School, USA

Chapter 7: Dividends vs. Reinvestments in Continuous Time: A More General Model

Ren-Raw Chen, Rutgers University, USA

Ben Logan

Oded Palmon, Rutgers University, USA

Larry Shepp, Rutgers University, USA

Chapter 8: Time Series Modeling of Asset Returns Volatilities

Tze Leung Lai, Stanford University, USA

Haipeng Xing, Columbia University, USA

Chapter 9: On Estimation Risk and Power Utility Portfolio Selection

Robert R. Grauer, Simon Fraser University, USA

Frederick C. Shen

Chapter 10: Segmenting financial services market: An Empirical Study of Statistical and Non-parametric Methods

Kenneth Lawrence, New Jersey Institute of Technology, USA

Dinesh Pai, Rutgers University, USA

Ronald Klimberg, St. Joseph’s University, USA

Stephen Kudbya, New Jersey Institute of Technology, USA

Sheila Lawrence, Rutgers University, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 11: Recovering Probabilistic Information From Options Prices and the Underlying

Bruce Mizrach, Rutgers University, USA

Chapter 12: Combinatorial Methods for Reverse-Engineering and Construction of Credit Risk Ratings

Alexander Kogan, Rutgers University, USA

Miguel A. Lejeune, Carnegie Mellon University, USA

Chapter 13: Displaced Log Normal and Lognormal American Option Pricing: A Comparison

Ren-Raw Chen, Rutgers University, USA

Cheng-Few Lee, Rutgers University, USA

Chapter 14: Are Tails Fast Enough to Explain Smile

Ren-Raw Chen, Rutgers University, USA

Oded Palmon, Rutgers University, USA

John Wald, Pennsylvania State University, USA

Chapter 15: Two Alternative Approaches to Derive Black-Schools Option Pricing Model: Comparison and Analysis

Cheng-Few Lee, Rutgers University, USA

Carle Shu Ming Lin, Rutgers University, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 16: Spurious Regression and Data Mining in Conditional Asset Pricing Models

Wayne Ferson, University of Southern California, USA

Sergei Sarkissian, McGill University, USA

Timothy Simin, Pennsylvania State University, USA

Chapter 17: Structural Approach for Credit Risk Modeling

Jingzhi Huang, Pennsylvania State University, USA

Chapter 18: An Empirical Investigation of the Rationales for Integrated Risk-Management Behavior

Michael S. Pagano, Villanova University, USA

Chapter 19: Implementing Risk Management Systems with a Benchmark: a Web-Based DSS Approach

Larry Eisenberg, University of Southern Mississippi, USA

Chang-tseh Hsieh, University of Southern Mississippi, USA

Chapter 20: The Le Chatelier Principle in the Markowitz Quadratic Programming Investment Model: A Case of World Equity Fund Market

Chin W. Yang, Clarion University of Pennsylvania, USA

Ken Hung, National Dong Hwa University, Taiwan

Jing Chui, Clarion University of Pennsylvania, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 21: Copula, Correlated Defaults and Credit VaR

Jow-Ran Chang, National Tsing Hua University, Taiwan

An-Chi Chen, KGI Securities Co. Ltd., Taiwan

Chapter 22: An Errors-in-variables Problem in Asset Pricing Tests

Dongcheol Kim, Rutgers University, USA

Chapter 23: Pricing and Hedging Interest Rate Derivatives In the Presence of Unspanned Stochastic Volatilities

Feng Zhao, Rutgers University, USA

Chapter 24: Liquidity Risk and Arbitrage Pricing Theory

Umut Cetin, Technische University Wein, USA

Robert A. Jarrow, Cornell University, USA

Philip Protter, Cornell University, USA

Chapter 25: Stock Returns, Extreme Values, and Conditional Skewed Distribution

Thomas C. Chiang, Drexel University, USA

Jiandong Li, Drexel University, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 26: MCMC Estimation of Multiscale Stochastic Volatility Models

German Molina, Vega Capital Services Ltd., UK

Chuan-Hsiang Han, National Tsing Hua University, Taiwan

Jean-Pierre Fouque, University of California, USA

Chapter 27: Security Market Microstructure: The Analysis of a Non-Frictionless Market

Robert Schwartz, Zicklin School of Business, USA

Reto Francioni,

Martin Reck

Chapter 28: Robust prediction of default risk?

Chung-Hua Shen, National Taiwan University, Taiwan

Yi-Kai Chen,National University of Kaohsiung, Taiwan

Bor-Yi Huang, Shih Chien University, Taiwan

Chapter 29: Risk Management for Catastrophe Loss

Jin-Ping Lee, Feng Chia University, Taiwan

Min-Teh Yu, Providence University, Taiwan

Chapter 30: Regime Shifts and the Term Structure of Interest Rates

Chien-Chung Nieh, Tamkang University, Taiwan

Shu Wu, The University of Kansas, USA

Yong Zeng, The University of Missouri at Kansas City, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 31: ARM Processes and Their Modeling and Forecasting Methodology

Benjamin Melamed, Rutgers Business School, USA

Chapter 32: Alternative Econometric Methods for Information-based Equity-selling Mechanisms

Cheng Few Lee, Rutgers University, USA

Yi Lin Wu, National Tsing Hua University, Taiwan

Chapter 33: Implementation Problems and Solutions in Stochastic Volatility Models of the Heston Type

Jia-Hau Guo, Soochow University, Taiwan

Mao-Wei Hung, National Taiwan University, Taiwan

Chapter 34: Univariate and Bivariate GARCH Analyses for the Volume versus GARCH effects

Zhuo Qiao, National University of Singapore, Singapore

Wing-Keung Wong, National University of Singapore, Singapore

Chapter 35: Application of Fuzzy Set Theory to Finance Research: Method and Application

Shin-Yun Wang, National Dong Hwa University, Taiwan

Cheng-Few Lee, Rutgers University, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 36: Hedonic Regression Analysis: A Primer

Ben J. Sopranzetti, Rutgers University, USA

Chapter 37: Risk-Adverse Portfolio Optimization via Stochastic Dominance Contraints

Darinka Dentcheva, Stevens Institute of Technology, USA

Andrzej Ruszczynski, Rutgers University, USA

Chapter 38: A Real Option Approach to the Comprehensive Analysis of Bank Consolidation Values

Chuang-Chang Chang, National Central University, Taiwan

Pei-Fang Hsieh, National Central University, Taiwan

Hung-Neng Lai, National Central University, Taiwan

Chapter 39: Numerical Methods of PDE in Computational Finance

Gang Nathan Dong, Rutgers University, USA

Chapter 40: Capital Structure in Asia and CEO Entrenchment

Kin Wai Lee, Nanyang Technological University, Singapore

Gillian Hian Heng Yeo, Nanyang Technological University, Singapore

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 41: Estimating Future Hedge Ratio: A General Hyperbolic Distribution Approach

Cheng-Few Lee, National Chiao Tung University, Taiwan

Jang-Yi Lee, Tunghai University, Taiwan

Kehluh Wang, National Chiao Tung University, Taiwan

Yuan-Chung Sheu, National Chiao Tung University, Taiwan

Chapter 42: The Sensitivity of Corporate Bond Volatility to Macroeconomic Announcements

Nikolay Kosturov, University of Oklahoma, USA

Duane Stock, University of Oklahoma, USA

Chapter 43: Option Pricing and Hedging Performance under Stochastic Volatility and Stochastic Interest Rates

Gurdip Bakshi, University of Maryland, USA

Charles Cao, Penn State University, USA

Zhiwu Chen, Yale University, USA

Chapter 44: Itô’s Calculus and the Derivation of the Black-Scholes Option-Pricing Model

George Chalamandaris, Athens University of Economics and Business, Greece

A.G. Malliaris, Loyola University Chicago, USA

Chapter 45: Portfolio Analysis

Jack Clark Francis, Baruch College, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 46: Equity Market Microstructure: The Analysis of a Non-Frictionless Market

Reto Francioni, Deutsche Bank, USA

Sonali Hazarika, Baruch College, USA

Martin Reck, Deutsche Bank, USA

Robert A. Schwartz, Baruch College, USA

Chapter 47: Raw Material Convenience Yields and Business Cycle

Chang-Wen Duan, Tamkang University, Taiwan

William T. Lin,Tamkang University, Taiwan

Chapter 48: Default and Prepayment Study in US Subprime Markets

C.H. Ted Hong, Beyondbond, USA

Chapter 49: The Valuation of Uncertain Income Streams and the Pricing of Options

Mark Rubinstein, University of California Berkley, USA

Chapter 50: A Primer on the Implicit Financing Assumptions of Traditional Capital Budgeting Approaches

Ivan Brick, Rutgers University, USA

Daniel Weaver, Rutgers University, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 51: Portfolio Theory, CAPM, and Performance Measures

Luis Ferruz, University of Zaragoza, Spain

Chapter 52: The Effect of Default Risk on Equity Liquidity: Evidence Based on the Panel Threshold Model

Huimin Chung, National Chiao Tung University , Taiwan

Wei-Peng Chen, Shih-Hsin University , Taiwan

Yu-Dan Chen, National Chiao Tung University , Taiwan

Chapter 53: Derivation and application of Greek letters

Cheng-Few Lee, Rutgers University, USA

David Chen, Rutgers University, USA

Weikang Shih, Rutgers University, USA

Chapter 54: Put option approach to determine bank risk premium

Dar-Yeh Huang, National Taiwan University, Taiwan

Fu-Shuen Shie, National Taiwan University, Taiwan

Wei-Hsiung Wu, National Taiwan University, Taiwan

Chapter 55: Alternative Methods to Determine Optimal Capital Structure: Theory and Application

Sheng-Syan Chen, National Taiwan University, Taiwan

Cheng-Few Lee, National Chiao Tung University, Taiwan

Han-Hsing Lee, National Chiao Tung University, Taiwan

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 56: Characteristic function and Finance Research

Ying-Lin Hsu, National Chung Hsing University, Taiwan

Cheng-Few Lee, Rutgers University, USA

Chapter 57: Entropy and Its Application in Finance Research

Hyley Huang, National Chiao Tung University and Wintek Corporation, Taiwan

Cheng-Few Lee, Rutgers University, USA

Chapter 58: Structure Equation Model in Finance and Accounting Research

Chingfu Chang, National Chengchi University, Taiwan

Cheng-Few Lee, Rutgers University, USA

Chapter 59: Genetic Programming for Options Pricing

Nemmara Chidambaran, Rutgers University, USA

Chapter 60: Predicting Prices with Defense Forecasting

Glenn Schafer, Rutgers University, USA

Sam Ring, Rutgers University, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 61: Hedging Theories and Applications

Keshab Shrestha, Nanyang Technological University, Singapore

Chapter 62: Intertemporal Equilibrium Models, Portfolio Theory and the Capital Asset Pricing Model

Stephen J. Brown, New York University, USA

Chapter 63: Issue of Corporate Finance Research

Kose John, New York University, USA

Chapter 64: Asian Options

Itzhak Venezia, Hebrew University, USA

Chapter 65: Keiretsu Style Main Bank Relationships, R&D Investment, Leverage, and Firm Value: Evidence from Japanese Listed Companies

Hai-Chin Yu, Chung Yuan University, Taiwan

Chih-Sean Chen, Chung Yuan University, Taiwan

Der-Tzon Hsieh, National Taiwan University, Taiwan

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 66: Alternative Models for Estimating the Cost of Equity Capital for Property/Casualty Insurers

Alice Lee, San Francisco State University, USA

J.D. Cumming, Temple University, USA

Chapter 67: An ODE Approach for the Expected Discounted Penalty at Ruin

Cheng Few Lee, Rutgers University, USA

Yu-Ting Chen, National Chao Tung University, Taiwan

Yuan-Chung Sheu, National Chao Tung University, Taiwan

Chapter 68: Functional Forms, Market Segmentation and Pricing of Closed-end Country Funds

Cheng-Few Lee, Rutgers University, USA

Dilip K. Patro, Federal Deposit Insurance Company, USA

Bo Liu, Rutgers University, USA

Alice C. Lee, San Francisco State University, USA

Chapter 69: Actuarial mathematics and its applications in quantitative finance

Cho-Jieh Chen, University of Alberta, Canada

Chapter 70: Examining the Impact of US IT Stock Market on Other IT Stock Markets

Zhuo Qiao, National University of Singapore, Singapore

Venus Khim-Sen Liew, Universiti Malaysia Sabah, Malaysia

Wing-Keung Wong, Hong Kong Baptist University, Hong Kong

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 71: Time-Series Econometrics and Dynamic Financial Models

Robert H. Patrick, Rutgers University, USA

Chaptere72 Framework of Structure Finance

Francis Eng, Rutgers University, USA

Chapter73 Persistence, Predictability and Portfolio Planning

Michael J. Brennan, University of California at Los Angeles, USA

Yihong Xia Wharton School, USA

Chapter 74 Application of Alternative ODE in Finance and Economics Research

Cheng Few Lee, Rutgers University, USA

Junmin Shi, Rutgers University, USA

Chapter 75 Term Structure and Risk Management

ChunChi Wu, University of Missouri, USA

Chapter 76 Issues in Operational Risk Modeling

Mo Chaudhury, State Street Corporation, USA

Satya Mohit, State Street Corporation, USA

Chapter 77 Application of Simultaneous Equation in Finance Research

Carl R. Chen, University of Dayton, USA

Cheng Few Lee, Rutgers University, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Chapter 78: Alternative Method for Credit Risk Management: Theory and Method

Cheng Few Lee, Rutgers University, USA

Bi-Huei Tsai, National Chiao Tung University, Taiwan

Kehluh Wang, National Chiao Tung University, Taiwan

Jessica Shin-Ying Mai, Rutgers University, USA

Chapter 79 : Future Hedge Ratios: A Review

Sheng-Syan Cheng, National Taiwan University, Taiwan

Keshab Shrestha, Nanyang Technological University, Singapore

Cheng Few Lee, Rutgers University, USA

Chapter 80 : International Portfolio Management: Theory and Method

Wan-Jiun Paul Chiou, Shippensburg University, USA

Cheng Few Lee, Rutgers University, USA

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Part VI –Summary and Concluding Remarks

A. Theory

B. Methods

C. Application

a. New Products

b. Trading Strategy

c. Hedging Strategy

d. Wealth Management

e. Risk Management

f. CDO and Subprime Markets

g. Others

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Part VII – Appendixes

A. Derivation of Dividend Discount Model

B. Derivation of DOL, DFL, and DCL

C. Derivation of M & M Propositions

D. Derivation of CAPM

E. Derivation of OPM

Part VIII– References

Part IX– Index

Subject Index

Author Index

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Table of Contents for Handbook of Quantitative Finance and Risk Management

I. Introduction

Quantitative finance is a combination of economics, accounting, statistics, econometrics, mathematics, stochastic process, and computer science and technology. This handbook will be the most comprehensive handbook in quantitative finance, which integrates theory, methodology, and application. Because of the importance of quantitative finance in the finance industry, it has become one of the most popular subjects in business school. In addition, the finance industry has many job opportunities for people with good training in quantitative finance. Thus, a handbook should have a broad audience and be of interest to academics, educators, students, and practitioners.

Based upon our years of experience in teaching, research, textbook writing, and journal editing on the subject of quantitative finance, this handbook will review, discuss, and integrate theoretical, methodological and practical issues of quantitative finance. This handbook will be structured as follows:

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Part I. Introduction

Part II. Essay

Part III. Portfolio Analysis

Part IV. Options and Futures

Part V. Contributed Papers

A. Theories

B. Methodologies

C. Applications

Part VI –Summary and Concluding Remarks

A. Theory

B. Methods

C. Application

Part VII. Appendix

Part VIII. References

Part IX. Index

A. Subject Index

B. Author Index

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Part II of this handbook will cover in detail the essential financial theories, financial policies, and empirical methodologies used in quantitative finance. Finance theories can be classified into (1) classical theory, (2) new classical theory, (3) CAPM and APT, and (4) theory of option and futures. Financial policies can be classified into (1) investment policy, (2) financing policy, (3) dividend policy, and (4) production policy. The empirical methodologies that will be covered in part II are statistics, econometrics, mathematics, operation research, stochastic process, and computer science, and technology. Therefore, part II of this handbook will be structured as follows:

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Table of Contents for Handbook of Quantitative Finance and Risk Management

  • Theory

    • Classical theory

    • New classical theory

    • CAPM and APT

    • Theory of option and futures

  • Policy

    • Investment policy

    • Financing policy

    • Dividend policy

    • Production policy

  • Methodology

    • Statistics

    • Econometrics

    • Mathematics

    • Operation research

    • Stochastic process

    • Computer science and technology

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Table of Contents for Handbook of Quantitative Finance and Risk Management

Most of part II will be written by Cheng Few Lee and Alice Lee. Some portion of part II will be written by other well-known scholars. Detailed derivation of theory and development of methodology will be presented in the appendix of this handbook. The Appendix of this handbook will give detailed derivation of different finance theory and model such as stock variation model M&M theory, portfolio theory, CAPM, APT, OPM, and future valuation model.

Part III of this handbook covers portfolio analysis and Part IV of this handbook includes options and futures. Part V of this handbook includes contributed papers which will be written by well-know quantitative finance scholars and practitioners. The theoretical portion of these contributed papers will cover important finance theory, such as stock valuation theory, M&M theories, portfolio theories, CAPM, OPM, options, futures and other relevant theories in quantitative finance. The methodology portion of the contributed papers will cover methodologies of statistics, econometrics, mathematics, operation research, simulation and computer programming in quantitative finance research. The applications portion of the contributed papers will cover applications of options and futures theories in different financial instruments and products. Portfolio analysis and mutual fund evaluation will also be presented in this portion. In addition, market risk, credit risk and operation risk will be discussed in this portion in detail.

Part VII will present Appendix. Part VIII will include important references in quantitative finance. Finally, both subject and author index will be presented in Part IX.


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