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INtroduction & framework Flashcards

1
Q

cross-sectional consistency

A

ensure internal consistency across asset classes

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2
Q

intertemporal consistency

A

ensure internal consistency across time horizons

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3
Q

Framework for Developing CME

A

(1) Specify expectations needed + time horizon
(2) Research the historical record
(3) Specify the method(s) + model(s)
(4) Determine the best sources for information needs.
(5) selected data and methods -> Interpret the current investment environment -> applying experience and judgment
(6) Provide the set of expectations needed, documenting conclusions
(7) Monitor actual outcomes and compare them with expectations, providing feedback to improve the expectations-setting process

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4
Q

3 Data Measurement Errors and Biases

A

(1) Transcription errors
(2) Survivorship bias
(3) Appraisal (smoothed) data

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5
Q

role of CME in long-term

A

(1) Formulate SAA
(2) Long-term expectations for allowable asset classes

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6
Q

role of short term of CME

A

making active investment decision

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7
Q

Limitations to using economic data

A

+ time lag (collection - distribution)
+ often revised
+ Data index re-base

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8
Q

Data measurement errors and biases

A

(1) Transcription errors
(2) Survivorship bias
(3) Appraisal (smoothed) data

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9
Q

Characteristic of historical estimates (da hoi trong mock test)

A
  1. Limitation:
    + regime changes
    + longer time period preferable
    () Adv: statistical required
    (    ) Disadv: asynchronous: (data points for different variables may not reflect exactly the same period even though they are labeled as if they do)
  2. Chatacteristic:
    + sample statistics from a longer history are more precise
    + using higher-frequency data improve the precision of sample var, cov, and correlation, but not precision of the sample mean
    + When many variables are considered, a large number of observations may be a
    statistical necessity (dat den tieu chuan thong ke can thiet).
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10
Q

Psychological Biases of forecasting in CME

A

(1) Anchoring
(2) Status quo
(3) Confirmation bias
(4) Overconfidence
(5) Prudence bias (over cautions in forecasting)
(6) Availability bias

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11
Q

3 kinds of Model Uncertainty

A

(1) Model uncertainty
(2) Parameter uncertainty
(3) Input uncertainty

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12
Q

Role of Economic Analysis

A

Connection btw Investment Outcome & Economic Output

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13
Q

Exogenous Shocks to Growth

A

events that occur outside the normal course of an economy
(1) Policy Changes
(2) New products and technologies
(3) Geopolitics
(4) Natural disasters
(5) Natural Resources/ Critical Inputs
(6) Financial Crises

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14
Q

Approaches to Economic Forecasting, Econometric Models: Advantages

A

+ Incorporate many variables
+ Can be reused (when specified)
+ Quantifiable Output (consistent relationship)

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15
Q

Approaches to Economic Forecasting, Econometric Models: disadvantages

A

+ Complex, time-consuming
+ Data may be difficult to forecast, changeable relationship
+ Output require interpretation or unrealistic
+ Not work well to forecasrt turning points
+ May give false sense of precision

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16
Q

Approaches to Economic Forecasting, Indicators: Advantages

A

+ Simple, Intuitive, Easy to interpret
+ Available Data
+ Customize Indicators to Forecasting needs

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17
Q

Approaches to Economic Forecasting, Indicators: disadvantages

A

+ inconsistent forecasting results
+ can provide false signals (da hoi mock test)
+ data revised frequently to fit business cycle better

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18
Q

Approaches to Economic Forecasting, Indicators: advantages

A

+ Less complex than econometrics
+ Flexible in mixing objective statistical analysis

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19
Q

Approaches to Economic Forecasting, Indicators: disadvantages

A

+ Subjective
+ Time-consuming
+ Complexity
+ Inconsistent view (through time)

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20
Q

transcription errors

A

errors in gathering and recording data

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21
Q

in lieu

A

= in stead of

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22
Q

Appraisal (smoothed) data characteristics:

A

+ less volatile than market-determined values
+ biased downward and correlations with other assets tend to be understated

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23
Q

model uncertainty

A

whether a selected model is structurally and/ or conceptually correct

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24
Q

Parameter uncertainty

A

quantitative model’s parameters are invariably estimated with error

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25
Input uncertainty
whether the inputs are correct
26
data mining bias
repeatedly searching a dataset until a statistically significant pattern emerges.
27
Ex Post Risk
risk in the past
28
ex ante risk
risk in predict in the future
29
smoothed data
the unfrequent trading data
30
Econometric analysis
the method uses statistical methods to formulate forecasting models.
31
Leading indicators
indicators that move ahead of the business cycle with a reasonable stable lead time. >< lagging indicator (coincident)
32
3 types of Economic indicators
(1) lagging indicators. (2) coincident indicators (reflect current economic activity) (3) leading indicators.
33
5 phases of business cycle
(1) initial recovery, (2) early expansion, (3) late expansion, (4) slowdown, and (5) contraction
34
initial recovery
(1) Duration: of a few months (2) Business confidence: rising (3) Government stimulus provided by low interest rates and/or budget deficits (4) Inflation: Decelerating (5) Output gap: but negative, Large (6) short-term interest rates: Low or falling (7) Bond yields: bottoming out (8) Stock prices: Rising (9) Cyclical, riskier assets such as small-cap stocks and high yield bonds: doing well (10) Moneytary: stimulative, transition to tightening
35
Early expansion
(1) Duration: a year to several years. (2) inflation: Increasing growth with low (3) confidence: Increasing (4) short-term interest rates: Rising (5) Output gap: is narrowing Stable or rising bond yields. Rising stock prices
36
Late expansion
High confidence and employment Output gap eliminated and economy at risk of overheating Increasing inflation Central bank limits the growth of the money supply Rising short-term interest rates Rising bond yields Rising/peaking stock prices with increased risk and volatility.
37
Slowdown
Duration of a few months to a year or longer Declining confidence Inflation still rising Short-term interest rates at a peak Bond yields peaking and possibly falling, resulting in rising bond prices Possible inverting yield curve. Falling stock prices.
38
Contraction
Duration of 12 to 18 months Declining confidence and profit Increase in unemployment and bankruptcies. Inflation topping out Falling short-term interest rates. Falling bond yields, rising prices Stock prices increasing during the latter stages, anticipating the end of the recession
39
7 steps to formulate capital market expectations,
(1) Specify asset classes & time horizon (2) Research historical record -> driver affect past performance (3) Identify Valuation Model (4) Determine the best information sources (5) Interpret current investment environment (6) Provide necessary expectations, documenting conclusions (7) Monitor actual outcomes and compare them with expectations
40
9 problems in forecast CME
(1) limitations to using economic data: (2) data measurement errors and biases (3) limitations of historical estimates (4) Using ex post data (after the fact) to determine ex ante (before the fact) risk and return can be problematic (5) Biases in Analysts' Methods (6) Fail to account for conditioning information (7) Misinterpretation of correlation (8) Psychological Biases (9) Model Uncertainty
41
asynchronous data
du lieu ko dong bo
42
2 types of Biases in Analysts' Methods
(1) Data-mining bias: repeated research until statistical significant pattern (2) Time period bias. Eg: Evidence suggesting that small-cap stocks outperform large-cap stocks over time is very sensitive to the choice of sample period.
43
time period bias
For example, small-cap U.S. stocks are widely thought to outperform large-cap stocks, but their advantage disappears when data from the 1970s and 1980s are excluded.
44
fail to account for conditioning information
analysts should account for current conditions in their forecasts
45
twin deficit problem
(1) government budget deficit (2) current account deficit
46
Application of forecast trend growth
(1) Forecasting returns with DCF models: incorporate the trend rate of growth (2) Stock reuturn: Higher trend growth rates may lead to higher stock returns assuming the growth is not already reflected in stock price (3) When we speak of higher trend growth rates, we mean the economy can grow at a faster pace before inflation becomes major concern (4) Higher gov bond yield: Higher trend growth rates tend to generate higher government bond yields.
47
3 approach to economic forecast
(1) Econometric Models (2) Indicators (3) Check list
48
Advantages & Dis of econometric approach
Adv: (1) Modeling can incorporate many variables. (2) Once the model is specified, can be reused (3) Output is quantified & base on a consistent set of relationships Disadv: (1) complex and time-consuming to construct (2) dificult to forecast and relationship can change (3) Output may require interpretation or be unrealistic (4) It does not work well to forecast turning points.
49
diffusion index
it is composite - a group of indicator
50
Adv & Dis adv indicators
Adv: (1) Economic indicators are simple, intuitive, and easy to interpret (2) Data are often readily available from third parties (3) Focuses primarily on identifying turning points Disadv: (1) History subject to frequent revision * Current” data not reliable as input for historical analysis. * Overfitted in-sample. Likely overstates forecast accuracy. (2) Can provide false signals of economic outlook (3) May provide little more than binary (no/yes)
51
Description, Adv and disadv of Checklist approach
1. Description: an analyst considers a series of questions. For example, to forecast GDP: + What was the latest employment report? + What is the central bank’s next move, given the latest information released? + What is the latest report on business investment?” Then the analyst uses judgment and perhaps some statistical modeling to interpret the answers and formulate a forecast. Judgment is required both in determining which factors to consider and how to interpret them. 2. Advantage: + Less complex than econometrics. + Flexible: * Structural changes easily incorporated * Items easily added/dropped * Can draw on any information, from any source, as desired + Breadth: Can include virtually any topics 3. Disadvantage: + Time-consuming + Subjective
52
out put gap
= actual growth - sustainable growth
53
what discount rate use when negative interest rate
use Taylor rate (instaed of risk free) for build up model
54
effect of FP and MP to yield curve
Ease - ease -> steepen Tight - ease -> less clear Tight - tight -> Contract
55
Country effects (da hoi trong Mock)
should capture systematic differences in the financial environment across countries
56
industry effects
control for systematic differences in risk & performance across sector types
57
characteristics of Risks in Emerging Market Equities (da hoi trong mock)
(1) country effects still tend to be more important than (global) industry effects (2) Local economic and market factors exert greater influence on risk and return (3) the emerging market debt investor needs to focus on ability and willingness to pay specific obligations, emerging market equity investors need to focus on the many ways that the value of their ownership claims might be expropriated by the government, corporate insiders, or dominant shareholders
58
Liability - relative approaches
(1) Liability - hedging portfolio (2) Surplus optimization
59
Transcription error
Errors in gathering and recording data
60
GTAA
seeks to take advantage of pricing or valuation anomalies across multiple asset classes, typically equities, fixed income, and currencies
61
What out put high-frequency data can improve ? + The precision of sample variances + covariances + correlations + Sample mean
Can improve: + The precision of sample variances + covariances + correlations Can not improve sample mean
62
when the frequency of observations increases, why the likelihood increases that data may be asynchronous across variables ?
data points for different variables may not reflect exactly the same period even though they are labeled as if they do. Eg: time zone differences
63
what is most serious ? + Model uncertainty + Parameter uncertainty + Input uncertainty
Model uncertainty
64
Luu y cac chinh sach anh huong den Oil -> deu la Exogenous Shocks to Growth vi Oil la impotant resource
65
Diffusion index
which measures how many indicators are pointing up and how many down Diffusion Index (DI)=(Advances−Declines)+PDIV where: Advances=Number of stocks moving higher Declines=Number of stocks moving lower PDIV=Previous DI value ​
66
How fiscal policy and monetary policy mix affect nominal rate
+ Fiscal policy: affect real rate (tight -, loose +) + Money policy: affect inflation (tight -, loose +) -> nominal interest = real rate + inflation
67
inflation tăng mạnh nhất giai đoạn nào
chuyển từ slowdown sang contraction Lạm phát cao kỷ lục là dấu hiệu bắt đầu của 1 cuộc suy thoái (giống như hiện tại)
68
when is short term interest rate highest
in slowdown stage Giống giai đoạn VN hiện tại, lãi suất huy động tăng cao kỷ lục
69
early extention of yield curve
+ Front section: steepening + Back half: flattening
70
contraction of yield curve
+ first: contraction + after: steepening

Capital market expectation (2 decks)

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