Mastering R for Quantitative Finance is a sequel of our previous volume titled Introduction to R for Quantitative Finance, and it is intended for those willing to learn to use R's capabilities for building models in Quantitative Finance at a more advanced level. In this book, we will cover new topics in empirical finance (chapters 1-4), financial engineering (chapters 5-7), optimization of trading strategies (chapters 8-10), and bank management (chapters 11-13).
Chapter 1, Time Series Analysis (Tamás Vadász) discusses some important concepts such as cointegration (structural), vector autoregressive models, impulse-response functions, volatility modeling with asymmetric GARCH models, and news impact curves.
Chapter 2, Factor Models (Barbara Dömötör, Kata Váradi, Ferenc Illés) presents how a multifactor model can be built and implemented. With the help of a principal component analysis, five independent factors that explain asset returns are identified. For illustration, the Fama and French model is also reproduced on a real market dataset.
Chapter 3, Forecasting Volume (Balázs Árpád Szűcs, Ferenc Illés) covers an intraday volume forecasting model and its implementation in R using data from the DJIA index. The model uses turnover instead of volume, separates seasonal components (U shape) from dynamic components, and forecasts these two individually.
Chapter 4, Big Data – Advanced Analytics (Júlia Molnár, Ferenc Illés) applies R to access data from open sources, and performs various analyses on a large dataset. For illustration, K-means clustering and linear regression models are applied to big data.
Chapter 5, FX Derivatives (Péter Medvegyev, Ágnes Vidovics-Dancs, Ferenc Illés) generalizes the Black-Scholes model for derivative pricing. The Margrabe formula, which is an extension of the Black-Scholes model, is programmed to price stock options, currency options, exchange options, and quanto options.
Chapter 6, Interest Rate Derivatives and Models (Péter Medvegyev, Ágnes Vidovics-Dancs, Ferenc Illés) provides an overview of interest rate models and interest rate derivatives. The Black model is used to price caps and caplets; besides this, interest rate models such as the Vasicek and CIR model are also presented.
Chapter 7, Exotic Options (Balázs Márkus, Ferenc Illés) introduces exotic options, explains their linkage to plain vanilla options, and presents the estimation of their Greeks for any derivative pricing function. A particular exotic option, the Double-No-Touch (DNT) binary option, is examined in more details.
Chapter 8, Optimal Hedging (Barbara Dömötör, Kata Váradi, Ferenc Illés) analyzes some practical problems in hedging of derivatives that arise from discrete time rearranging of the portfolio and from transaction costs. In order to find the optimal hedging strategy, different numerical-optimization algorithms are used.
Chapter 9, Fundamental Analysis (Péter Juhász, Ferenc Illés) investigates how to build an investment strategy on fundamental bases. To pick the best yielding shares, on one hand, clusters of firms are created according to their past performance, and on the other hand, over-performers are separated with the help of decision trees. Based on these, stock-selection rules are defined and backtested.
Chapter 10, Technical Analysis, Neural networks, and Logoptimal Portfolios (Ágnes Tuza, Milán Badics, Edina Berlinger, Ferenc Illés) overviews technical analysis and some corresponding strategies, like neural networks and logoptimal portfolios. Problems of forecasting the price of a single asset (bitcoin), optimizing the timing of our trading, and the allocation of the portfolio (NYSE stocks) are also investigated in a dynamic setting.
Chapter 11, Asset and Liability Management (Dániel Havran, István Margitai) demonstrates how R can support the process of asset and liability management in a bank. The focus is on data generation, measuring and reporting on interest rate risks, liquidity risk management, and the modeling of the behavior of non-maturing deposits.
Chapter 12, Capital Adequacy (Gergely Gabler, Ferenc Illés) summarizes the principles of the Basel Accords, and in order to determinate the capital adequacy of a bank, calculates value-at-risk with the help of the historical, delta-normal, and Monte-Carlo simulation methods. Specific issues of credit and operational risk are also covered.
Chapter 13, Systemic Risk (Ádám Banai, Ferenc Illés) shows two methods that can help in identifying systemically important financial institutions based on network theory: a core-periphery model and a contagion model.
Gergely Daróczi has also contributed to most chapters by reviewing the program codes.