Handbook of Financial Engineering (eBook)

Preface 7
Contents 13
List of Contributors 15
Portfolio Management and Trading 18
Portfolio Selection in the Presence of Multiple Criteria 19
1 Introduction 19
2 Initial Stochastic Programming Problem 22
3 Equivalent Deterministic Formulations 23
4 Portfolio Selection with Multiple-Argument Utility Functions 26
5 Mean-Variance Nondominated Sets 30
6 Solving a Multiple Criteria Portfolio Selection Problem 33
7 Conclusions 36
References 37
Applications of Integer Programming to Financial Optimization 41
1 Introduction 41
2 Mean-Risk Portfolio Optimization Problems 42
3 Maximal Predictability Portfolio Optimization Problems 49
4 Choosing the Best Set of Financial Attributes in Failure Discriminant Analysis 55
References 63
Computing Mean/Downside Risk Frontiers: The Role of Ellipticity 65
1 Introduction 65
2 Main Proposition 66
3 The Case of Two Assets 70
4 Conic Results 75
5 Simulation Methodology 77
6 Conclusion 81
References 82
Exchange Traded Funds: History, Trading, and Research 83
1 Introduction 83
2 The History of ETFs 84
3 ETF Trading 88
4 ETFs’ Pricing Efficiency 98
5 ETF Performance 100
6 The Impact of the Introduction of ETFs on Trading and Efficiency of Related Securities 101
7 More Studies Devoted to ETFs 107
8 Conclusion and Perspectives 109
References 110
Genetic Programming and Financial Trading: How Much About "What We Know” 114
1 Motivation and Literature Review 114
2 Genetic Programming 116
3 Fitness Function 119
4 Data and Data Preprocessing 123
5 Results 125
6 Concluding Remarks 147
Appendices 151
References 168
Risk Management 170
Interest Rate Models: A Review 171
1 Introduction 171
2 Continuous-Time Models of Interest Rates 171
3 Simple Short-Rate Models 172
4 Estimating Interest Rate Models 177
5 Multifactor Models of Interest Rates 180
6 Estimating a Two-Factor Model for German Interest Rates 184
7 Stochastic Term Structure Models 199
8 Multifactor HJMModels 203
9 Market Models: The LIBOR Approach 204
10 Volatility and Correlation in Forward Rates 208
11 Concluding Remarks 209
References 212
Engineering a Generalized Neural Network Mapping of Volatility Spillovers in European Government Bond Markets 215
1 Introduction 215
2 The Volatility Spillover Model 217
3 The Data 221
4 ANN Estimation of Volatility Spillover 224
5 Summary and Conclusions 239
References 241
Estimating Parameters in a Pricing Model with State- Dependent Shocks 244
1 Introduction 244
2 The Pricing Model 245
3 Parameter Estimation 248
4 Fitting the Shocks: A Peaks Method 251
5 Numerical Tests 252
6 Conclusion 256
References 256
Controlling Currency Risk with Options or Forwards 258
1 Introduction 258
2 The International Portfolio Management Model 261
3 Currency Hedging Strategies 271
4 Empirical Results 275
5 Conclusions 286
Appendix: Pricing Currency Options 287
References 289
Operations Research Methods in Financial Engineering 292
Asset Liability Management Techniques 293
1 Introduction 293
2 Bank ALM Techniques 296
3 Conclusions 307
Appendix 308
References 310
Advanced Operations Research Techniques in Capital Budgeting 313
1 Scope of the Chapter 313
2 The Traditional Discounted Cash Flow Approach 315
3 Multicriteria Analysis 318
4 Fuzzy Treatment of Uncertainties 324
5 Treatment of Uncertainties Using Real Options 340
6 Conclusions 353
References 353
Financial Networks 355
1 Introduction 355
2 Financial Optimization Problems 357
3 General Financial Equilibrium Problems 360
4 Dynamic Financial Networks with Intermediation 371
5 Numerical Examples 385
References 390
Mergers, Acquisitions, and Credit Risk Ratings 395
The Choice of the Payment Method in Mergers and Acquisitions 396
1 Introduction 396
2 The Origin of the Asymmetric Information Models and Myers and Maljuf’s Model ( 1984) 399
3 The Informational Asymmetry Models Subsequent to Myers and Maljuf ( 1984) 404
4 The Impact of Taxation on the Choice of the Payment Method 411
5 The Theories Linked to Managerial Ownership and to Outside Monitoring 417
6 The Past Performances, the Investment Opportunities, and the Business Cycles 424
7 The Optimal Structure of Capital 427
8 The Theories Linked to the Delays of Achievement of the Deal 429
9 The Acquisition of Nonpublic Firms 430
10 Conclusions 433
References 434
An Application of Support Vector Machines in the Prediction of Acquisition Targets: Evidence from the EU Banking Sector 441
1 Introduction 441
2 M& As Trends in the EU Banking Industry
3 Literature Review 444
4 Support Vector Machines 448
5 Data and Variables 450
6 Empirical Results 457
7 Conclusions 460
References 461
Credit Rating Systems: Regulatory Framework and Comparative Evaluation of Existing Methods 467
1 Introduction 467
2 Credit Rating Systems 468
3 Comparison of Classification Methods for the Development of Credit Rating Models 476
4 Conclusions and Future Perspectives 494
References 495
Index 499