regression applications in finance

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1、c05-RegressionAppsPage169Thursday,October26,20062:03PMCHAPTER5RegressionApplicationsinFinanceegressionanalysisistheeconometrictoolmostcommonlyusedbyRassetmanagersinfourofthefivestepsoftheinvestmentmanage-mentprocessdescribedintheappendixtoChapter1.Itisusedinset-tinginvestmentpolicy,selectinga

2、portfoliostrategy,selectingspecificassets,andmeasuringandevaluatingperformance.Webeginthischap-terwithanoverviewoftheuseofregressionanalysisineachofthesesteps.Wethenprovideillustrationsofspecificapplications,namely(1)atestofstrong-formpricingefficiency;(2)testsofthecapitalassetpricingmodel;(3)u

3、singthecapitalassetpricingmodeltoevaluatemanagerperformance;(4)constructingSharpebenchmarksforperformanceeval-uation;and(5)varioususesinbondportfoliomanagement.Regressionanalysisalsoplaysanimportantroleintheconstructionofmultifactormodels.However,becausetheconstructionofmultifactormodelsdraw

4、sonseveraladditionaleconometrictools,theconstructionofthesemod-elsistreatedseparatelyinChapter13.APPLICATIONSTOTHEINVESTMENTMANAGEMENTPROCESSInthissectionweprovideanoverviewoftheuseofregressionanalysisinfourstepsoftheinvestmentmanagementprocess.SettinganInvestmentPolicySettinganinvestmentpol

5、icyorpolicyguidelinesbeginswiththeassetallocationdecision:howthefundstobeinvestedshouldbedistributedamongthemajorclassesofassets.Anassetallocationmodelisusedto169c05-RegressionAppsPage170Thursday,October26,20062:03PM170FINANCIALECONOMETRICSprovideguidanceinmakingthisdecision.Whilethereareman

6、yassetallocationmodelsproposed,thecriticalinputinallofthemistheexpectedreturnforanassetclass.Theexpectedreturnforanassetclassisestimatedusingregressionanalysis.Theprocessbeginswiththeselectionofanassetpricingorassetreturnmodel.AsexplainedinChapter1,thesemodelsbelongtothreedif-ferentfamilies:

7、(1)generalequilibriummodels,(2)econometricmodels,and(3)arbitragepricingmodels.Thefirsttwomodelsrelyontheecono-metrictoolsdiscussedinthisbook.Themostwell-knowngeneralequilib-riummodelisthecapitalassetpricingmodel(CAPM).Wediscusslaterhowregressionanal