Handbook of Computational Finance
Any financial asset that is openly traded has a market price. Except for extreme market conditions, market price may be more or less than a “fair” value. Fair value is likely to be some complicated function of the current intrinsic value of tangible or in
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Computational Finance: An Introduction Jin-Chuan Duan, James E. Gentle, and Wolfgang Karl H¨ardle
1.1 Computational Statistics, Finance, and Computational Finance This book is the fourth volume of the Handbook of Computational Statistics. As with the other handbooks in the series, it is a collection of articles on specific aspects of the broad field, written by experts in those areas. The purpose is to provide a survey and summary on each topic, ranging from basic background material through the current frontiers of research. The development of the field of computational statistics has been rather fragmented. We hope that the articles in this handbook series can provide a more unified framework for the field. The methods of computational statistics have pervaded most areas of application, particularly such data-rich fields as finance. The tools of computational statistics include efficient computational algorithms, graphical methods, simulation, and resampling. These tools allow processing of massive amounts of data and simulation of complex data-generating processes, leading to better understanding of those processes.
J.-C. Duan () Department of Mathematics, National University of Singapore, Singapore 119077 e-mail: [email protected] J.E. Gentle Department of Computer Science, George Mason University, VA, USA e-mail: [email protected] W.K. H¨ardle Ladislaus von Bortkiewicz Chair of Statistics and CASE - Center for Applied Statistics and Economics, Humboldt-Universit¨at zu Berlin, Spandauer Straße 1, 10178 Berlin, Germany and Graduate Institute of Statistics, CDA - Centre for Complex Data Analysis, National Central University, No. 300, Jhongda Rd., Jhongli City, Taoyuan County 32001, Taiwan, (R.O.C.) e-mail: [email protected] J.-C. Duan et al. (eds.), Handbook of Computational Finance, Springer Handbooks of Computational Statistics, DOI 10.1007/978-3-642-17254-0 1, © Springer-Verlag Berlin Heidelberg 2012
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1.1.1 Finance The field of finance is concerned with asset prices, how they vary over time, and risk associated with that variation. Anything that is openly traded has a market price that may be more or less than some “fair” price. For shares of corporate stock, the fair price is likely to be some complicated function of intrinsic (or “book”) current value of identifiable assets owned by the company, expected rate of growth, future dividends, and other factors. Some of these factors that affect the price can be measured at the time of a stock transaction, or at least within a relatively narrow time window that includes the time of the transaction. Most factors, however, relate to future expectations and to subjective issues, such as current management and corporate policies, that are believed to affect future financial performance of the corporation. There are many motivating factors for the study of financial data. Investors, speculators, and operators seek an advantage over others in the trading of financial assets. Academics often find a different motive for studying financia
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