Nonparametric analysis for risk management and market microstructure

• Main Author: Cosma, Antonio
• Format: Others
• Language: en
• Published: Universite catholique de Louvain 2004
• Subjects: Conditional quantiles; Financial durations; Shape preserving estimation; Non orthogonal wavelets; Nonparametric statistics; Time series
• Online Access: http://edoc.bib.ucl.ac.be:81/ETD-db/collection/available/BelnUcetd-12132004-153308/

This research develops and applies nonparametric estimation tools in two sectors of interest of financial econometrics: risk management and market microstructure. In the first part we address the problem of estimating conditional quantiles in financial and economic time series. Research in this field received great impulse since quantile based risk measures such as Value at Risk (VaR) have become essential tools to assess the riskiness of trading activities. The great amounts of data available in financial time series allows building nonparametric estimators that are not subject to the risk of specification error of parametric models. A wavelet based estimator is developed. With this approach, minimum regularity conditions of the underlying process are required. Moreover the specific choice of the wavelets in this work leads to the constructions of shape preserving estimators of probability functions. In other words, estimates of probability functions, both densities and cumulative distribution functions, are probability functions themselves. This method is compared with competing methods through simulations and applications to real data. In the second part we carry out a nonparametric analysis of financial durations, that is of the waiting times between particular financial events, such as trades, quote updates, volume accumulation, that happen in financial markets. These data display very peculiar stylized facts one has to take into account when attempting to model them. We make use of an existing algorithm to describe nonparametrically the dynamics of the process in terms of its lagged realizations and of a latent variable, its conditional mean. The estimation devices needed to effectively apply the algorithm to our dataset are presented in this part of the work.