Chapter 1 - Introduction

Question 1

what is a fundamental problem with the economical use cases of econometrics?

Answer 1

Small samples problem. We usually dont have much data.

Financial applications does not share this issue.

In finance, the data is “actual” and well defined. It contrasts with the economical data, as the economical data is often estimated, and not necessarily the actual data.

Question 2

elaborate on issues with financial data

Answer 2

Usually very noisy. Noisy data implies that it is more difficult to locate trends and patterns in the data.

Another key issue is that financial data is usually not normally distributed, although many models assume it is.

Question 3

elaborate on market microstructures

Answer 3

Market microstructures is about how demands of investors are ultimately reflected in the price and volume of securities.

The goal is to understand various aspects of the market. For instance, what type of oppositions there are, and how they act. Liquidity is a big thing, information reflection is a big thing.

Market microstructure effects are also important because of their effect on our pattern discovery process.

Question 4

proxies for liqudity

Answer 4

Volume and time between trades