Hello friends, good morning, welcome to eFinance Study. I am Dr. Kamini Rai and today in this particular video we will be discussing about financial econometrics. Friends, this is only an introductory part of financial econometric where we will discuss what is financial econometrics, what are the practical applications of financial econometric, what are different tools and techniques used in financial econometric, all these we will discuss here.
But before going ahead, firstly we need to know that what is econometric. So if we talk about the econometric in simple words we can say that econometric means an application of mathematics and statistics to different fields of economics or we can say like econometrics is based upon the development of statistical methods for estimating economic relationship or testing economic theory. So these two points are important here like estimating or establishing economic relationship.
Like for example If we have to check the impact of change in price on the quantity demanded it means how much quantity demanded influenced by the change in price of particular commodity or we have to check like consumption pattern how much consumption pattern influenced by change in income of an individual all these we can check by using econometrical model or we have to test the theory whether that particular theory is applicable to our data set or not. for that purpose also we can use econometrical tools and furthermore if we talk about the application the practical application of econometrics so we can see here like common application of econometrics is the forecasting it means for forecasting or prediction purpose we use econometrical model especially in macroeconomic variables like we have to predict interest rates we have to predict or forecast inflation rates GDP per capita income and it is also applicable in many more microeconomic variables. Now if we talk about the financial econometrics so again in simple words we can say that financial econometric means an application of statistics statistical tools, mathematical tools and economics in the area of finance or we can say that financial econometrics is the subject of research obviously this is very important subject of research that has been defined as an application of statistics and mathematics to the financial market data so here we will focus on the financial market data only and obviously it is differ from the other econometrical tool because its main focus is on the analysis of price of assets its main focus is on the valuation of assets assets and all those financial assets which are traded in the financial markets. And then if we talk about the area of study then area of study includes like in capital market capital market both in primary and secondary market financial econometrical tools are applicable for the forecasting or prediction in corporate finance public finance corporate governance name a few these are important areas where we use financial econometrical tools. and then if we talk about the applied research obviously it is also applicable in many applied research like in banks banks and financial institutions they largely use financial econometrical tool to forecast inflation rates to forecast interest rates etc in hedge funds to minimize the risk associated with the assets we use financial econometrical tools insurance companies they use financial econometrical tools trading companies these are different areas where we use use financial econometrical tools and along with these many more other industries also use financial econometrical tools and then it is also used in the valuation of security especially we use the valuation of security in valuation of securities or valuation of financial assets we use financial econometrical tools portfolio management to find out the opportunity optimum asset included in the portfolio, risk management to minimize the risk associated with the asset and the quantitative trading and other many more areas where we use financial econometrical tools like in currencies, in currency valuation, like in portfolio management, like in derivatives, we use financial econometrical tools.
Now, the application of financial econometrics. If we talk about the application of financial econometrics, it is largely applicable in many areas like in asset pricing or valuation of securities like in CAPM model. or arbitrage pricing model. CAPM model is capital asset pricing model or arbitrage pricing model.
As we know that CAPM model is used for the valuation of securities considering systematic risk associated with the securities and in arbitrage pricing model we use when the traders they have to take advantages they have to make money of difference in prices of assets difference in prices of securities in two different markets and they make money out of it so in the valuation of securities we largely use financial econometrical tools then it is also used in the forecasting or prediction like time series we use panel data we use in the forecasting or prediction of security prices or for the the forecasting of price index it means for the security prices or for forecasting the price index we use financial econometrical tools and many financial econometrical tools are also used for risk management or volatility modeling it is essential for the risk management when it is important to know how often the particular investment outcomes are expected to occur like in a month in a week in a year etc you And in volatility modeling, it is useful to forecast to quantify the risk. It is useful to forecast or predict future uncertainty that affect the prices of securities because risk associated with uncertainty and generally higher the risk, higher the uncertainty, higher volatility would be there. And if there is higher volatility, then obviously we can expect higher return from the investments. And then if we talk about the portfolio management, then portfolio managers, they use financial econometrics to find out the optimum assets to be allocated in particular portfolio so that we can get maximum returns. And then to find out the efficient market hypothesis in the financial econometrics we use, financial econometrics we use, whether there is efficiency or deficiency in the stock market.
Then come to the models or the tools that are quite often used in the financial econometrics. So if we talk about the models then regression model very important model of financial econometric regression models we use to find out the relationship between two variables the dependent one and the independent one or between multiple independent variables like panel data regression model linear regression model multinominal regression models these are important regression models that we largely use to find out the relationship between variables then logit and probit models these models are also very important models of financial econometrics these are binary variable regression models we can say and all these models we will discuss separately in our separate video or upcoming videos also and then the stationary and non-stationary time series obviously time series is very important technique used in financial econometric to find out We use time series to find out basically the trends or to predict particular variable. Then Arema model, Arema model is quite often used to predict stock prices in the financial market. Then Arch and the GARGE model, these models are also very useful to find out the pattern of risk associated with the stock. To find out the pattern of risk, how much stock, how much volatility is there, how much stock.
prices are changes with the change in particular event and it is also useful to predict future uncertainty to find out the volatility in this talk prices and then to establish correlation between the two or more variables we use co-integration or error correlation models we use these models to find out or establish the correlation between two variables and along with all these models there are many more models that we use in financial econometric to predict the financial market that we will discuss in the separate video then come to the books of financial econometrics so these are famous books of financial econometrics like financial econometric by damodar gujarati financial econometric by woodridge i personally follow these books and these books are very uh these books are very important or very famous book of financial econometric we can say however many more other books are also there that you may follow to learn the financial econometrical tools and if we talk about the softwares that are largely used in the financial econometrics so these are different softwares these are different important tools that we used in financial econometric like our software gretel python evo's stata etc where our software gretel python these are open source software and along with this c plus plus we can also use and if you use this data these are paid software so any of the above software you you can use to find out your results financial results thank you so much so in this way we have covered the introductory part of financial econometric if you have any query you can mail me at rykm53 gmail.com and if you have not subscribed my channel kindly subscribe the same thank you so much