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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