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Index
Akaike information criterion, 339 Box Jenkins methodology, 422, 43
Anomalies, 169, 185 Bretton Woods, 255, 256, 290, 299
Anti-inflation policy, 207, 250 Bubble, 156-168, 193, 195, 301, 3
Arbitrage, 63, 172, 259, 268-271 collapsing, 157, 162, 163, 167,
Arbitrage pricing theory (APT), 61-67, 74, 75, exogenous, 157, 161, 302
129, 401 explosive, 156, 162
Arbitrageurs, 174, 179 intrinsic, 157, 163- 167, 360
ARCH model, 43-45, 183, 202, 375-380, rational, 156-163, 167, 195, 30
389, 398-415,438-442 Budget constraint, 49, 223, 391, 39
ARIMA models, 286, 287, 398, 420-442 Budget deficit, 393
ARMA models, 117, 126-127, 151-153, 161, Bullish, 182, 183, 203
339, 382, 421, 422, 426-437 BZW equity index, 367
Asset demand, 54-57
Augmented Dickey Fuller test (see Dickey-
Fuller test) Capital asset pricing model (CAPM
Autocorrelation, 421, 422, 426 82-88, 96, 97, 103, 122, 127
Autocovariance function, 422, 426 177, 178, 190, 221, 222, 248,
Autoregressive models (see ARMA models) 373-377,381-412
consumption (see consumption
post-tax, 72, 73
Bankruptcy, 177, 201 zero beta, 48-54, 69, 234, 248,
Bearish, 182, 183, 203, 204 Capital gaidloss, 345, 363, 364, 3
Beta, 24, 41-46, 57-61, 70-73 Capital market, 19, 187
Bid-ask spread (see also spread), 124, 173 Capital market line (CML), 37-39,
Big-Bang, 174 Capital mobility, 291 -293
Black Wednesday, 256, 257 Central bank, 207, 266, 271, 280,
Bond, 3-10, 178, 208, 211-227, 234, 250, Chaos, 169, 176, 195, 196, 205-29
297, 309, 311, 313, 375, 401, 402, Chartists, 174, 179, 194, 198-201,
407-41 331
corporate, 207, 212, 237, 272, 379, 392, Chi-squared distribution (see distri
393 Closed end fund, 170-173, 185
coupon paying, 8, 212, 246, 249 Cochran-Orcutt transformation, 452
government, 189, 207, 212, 326, 392, 393, Cointegration, 162, 302, 328, 329,
434 -438
397, 398
zero coupon, 212, 229, 234, 340, 402, 413, Commercial paper, 353, 356
414 Consol (see Perpetuity)
pure discount, 7, 212, 213, 241, 245, 249, Consumer Price Index, 368
331, 402 Consumption, 294, 353, 355, 368,
Bond market, 207-214, 234, 249, 315, 332, 408
344, 374,376,402-411 Consumption CAPM (CCAPM), 7
Bond price, 211-218,246-247 128, 133-140, 408
Cost mark up equation, 431 Ordinary least squares (OLS), 1
Covariance conditional, 409-413, 438 242, 244, 253, 272, 276, 27
Credit limit, 271 324, 325, 373, 435, 443-45
Currency, 255, 261, 292, 305-307, 376, 444 Seemingly unrelated regression
(SURE), 276, 324, 334, 39
Euler equation, 77-85, 138, 154- 1
Data, 237, 277-284, 302, 328, 403, 444
302
Debt-equity ratio, 379
Eurocurrency market, 268
Detrending, 344, 425, 426
Eurocurrency rate, 269, 271, 397
Devaluation, 270, 282, 283
European Monetary System (EMS)
Diagnostic test, 129, 342, 351, 430
Excess holding period yield (see H
Dickey Fuller test (DF test), 435
Excess volatility (see volatility)
Discount factor, 136, 344, 373, 380, 381
Exchange rate, 194, 200-207, 255
Discount rate, 346-350, 360-367, 378
290-307, 376,417
Discounted present value (DPV), 3-21, 76-88,
fixed/floating, 255-257, 271, 28
104- 112, 136- 147, 178, 188, 208-216,
real, 262-265, 292, 298
311, 350, 363-365, 378-381
Exchange Rate Mechanism (ERM)
Distribution, 58, 71, 100, 111, 126, 152, 168,
290, 300
182, 183, 321, 386, 392, 418, 419, 434,
Exchange rate overshooting, 256, 2
441
291 -295
Dividend, 9, 10, 346-352, 359-368, 372,
Expectations
380-387, 434
mathematical, 100- 102, 114
Dividend price ratio, 346-354, 359, 360,
Rational (see Rational expectati
366-369, 375, 377, 387
Dornbusch overshooting model, 293-295 revision to, 363, 364
Dow Jones index, 130, 161 Expectations hypothesis (EH), 208
Duration, 217 219-232, 237, 240-252, 309-
339-340, 348, 403-408, 443
Extrapolative predictor, 447-449
Earnings, 360
Earnings price ratio, 355
Economic fundamentals (see fundamentals)
Factor analysis see APT)
Economic model, 417, 427, 431, 432
Fads, 175, 183, 185, 202, 342, 360
Economic theory, 417, 431 -433
Fair game, 77, 94, 96, 100-104, 15
Economic time series (see time series)
Federal Reserve, 244, 404
Efficiency (see informational efficiency)
Feedback trader, 118-120, 179, 38
Efficient frontier, 25, 29-33, 37
Fisher hypothesis, 226, 265, 292, 2
Efficient markets hypothesis (EMH), 44,
Flex-price monetary model, 290-30
93-100, 105-129, 134, 143-152,
Forecast, 311-316, 323-335, 346-3
169-181, 194, 201, 208-215, 231-234,
359, 360, 380, 410, 424, 425,
249,265, 269-288,309-315,338-368,
444,449
377, 387,438
conditional, 422-426
Efficient portfolio (see portfolio)
multiperiod, 320, 334, 339, 342
EMU 257
unconditional, 415
Employment, 207, 256, 293, 294, 303
Forecast error, 242, 250, 283, 310,
Error correction model, 306, 342, 343,
434-437 341,353,363,365,377-391,40
Errors in variables method (EVM), 443-452 422,427,438-447
Estimation Forecasting
2 stage least squares (2SLS), 272, 275, 403, chain rule of forecasting 311, 32
443-452 Forecasting equation, 311, 312, 318
Generalised least squares, 443, 445, 452 359, 364
281-288, 293-300,304-30
288, 334, 337
397
Forward premium, 252, 253, 275-278, 289,
testing, 268-289
303, 305, 334-340
Internal rate of return, 6-21
Forward rate, 251, 252, 259-268, 273-280,
International Fisher hypothesis (se
288, 334-340
hypothesis)
Forward rate unbiasedness (FRU), 264-268,
International Monetary Fund (IMF
272-289,334-342
Investment appraisal 6, 15-20

GARCH model, 183, 301, 377, 383-389, 400, January effect, 123, 129, 169-173
406, 415, 438-442, 452 Johansen procedure, 434, 437
Gaussian error, 418, 426
Gearing, 190, 389, 393
Geometric random walk (see random walk) Lag operator, 418-421
Gordon™s growth model, 135, 164, 347, 359 Leverage, 379
Granger causality, 325-330, 348-354, Likelihood ratio test, 309, 315-31
433-438, 449 336, 396,411
Linear combination
Linearisation, 363, 368
Herding, 156, 175, 176, 190, 202 Liquidity preference hypothesis, 2
Holding period return yield (HPY), 9, 10, 219-221, 228, 231-237, 252
208-253, 331, 345, 353, 358, 368, 376, Liquidity premium (see risk prem
397-414 London Interbank Rate (LIBOR, L
Hyperinflation, 262, 292, 298, 300 326-328

MA process (see also ARIMA mo
Indifference curve, 3, 10-18, 38, 39, 50, 55-57
123, 420-423,437
Inflation, 54, 108, 130, 207, 218, 226, 252,
Maastricht Treaty, 288
256, 263-267, 272, 295, 300-307, 378, Marginal rate of substitution (MR
393, 400-406, 431 Market psychology, 156, 285
Information set, 261, 312, 327, 330-341, Market segmentation hypothesis,
348-369,386,396,404-411,423,426, 219-223, 231, 243, 331, 404
433, 443-452 Markov switching model, 127, 16
Informational efficiency, 105- 117, 138- 142, Martingale, 94, 99-104, 113, 159
147-150, 159,265, 283, 309-310, 315, 244, 249, 250, 301
368, 404, 406 Matrix
semi strong form, 105 companion, 322, 372
strong form, 105 variance-covariance, 227, 242,
weak form, 105, 117, 128, 133 321-325, 365, 373, 396, 4
Insider information, 105 Maturity spectrum, 213, 245-249
Integrated GARCH (IGARCH) (see GARCH 326, 331, 332, 402
model) Mean reversion, 172, 178-185, 2
Interest rate, 3-20, 33-73, 130, 207-212, 243, Mean variance criterion, 26, 30
244, 259-269, 290-298, 309, 315-333, Mean variance model, 179, 375,
375 -409 399, 405
continuously compounded, 3-8, 20, Measurement error, 397, 401, 407
211-233, 251, 414 Merger, 19, 93, 105, 113
Modigliani-Miller theorem, 99, 1
real, 104, 257, 290-293,
Money market, 293, 294
risk free, 10-25, 33, 34, 48-65, 82-116,
Money market line, 17
121, 146, 214, 220-237
Pure expectations hypothesis (PEH
expectations hypothesis)
NAIRU, 431
Net present value (see discounted present
Random walk, 94, 104, 105, 122-1
value) 143-150, 162, 183, 194, 195,
Neural network, 202, 205, 302 299-306, 342,400,419-426
Neutrality of money, 291 -294 Rate of return, 3-5, 49, 98, 235-24
Noise trader, 118-128, 169-204, 258, 282, Rational expectations, 94- 123, 145
284, 288, 299-307, 375-377, 380, 201, 227-232, 242, 243, 250,
387-390 302-332,350-355,402-406,4
Non-stationarity (see stationarity) Rational valuation formula (RVF),
NYSE, 129, 133, 172, 365, 384,400 116-118, 143-155, 162, 179,
211-215, 220, 223, 311-313,
353-367
OECD, 300,326 Real interest differential model (RI
Omitted variables, 149, 399, 436, 437, 449 295 -298
Orthogonality condition, 94- 110, 138- 141, Real interest rate parity (see intere
147-154, 167, 248, 272, 281, 319, 323, parity)
325, 336, 444 Real interest rate (see interest rate)
Output, 256, 378-380, 431 Redemption yield (see yield to ma
Restriction
cross equation restriction, 298, 3
Pension fund, 170, 173, 176, 207, 332 315-323, 335-344, 353,35
Perfect foresight linear restriction, 349
rate, 224, 228-234 non-linear restriction, 324, 349,
regression, 331 Return (see also rate of return)
price, 178, 215, 240, 311, 344, 345, 350, excess, 41-112, 128-135, 159,
351, 358, 360 222, 345,349-357,383-407
spread, 208, 225, 227, 231, 237, 242, 245, expected, 23-104, 124, 149, 152
246, 319, 325-330 260,352,363-374,387-400
Performance index, 25, 47, 57-61, 131, 132 linearisation, 368, 369
Perpetuity, 9, 212, 216, 240 multiperiod, 358-368
Persistence, 176, 183, 344, 352, 361-390, 400, Risk, 20-45,54-67, 259,270,357
412,413, 440, 442 402-414
Peso problem, 147-252, 258, 279, 282-284, default, 212
288, 299, 301 fundamental, 174
Phillips curve, 266, 267, 291-294 idiosyncratic/specific, 62, 63
Plaza and Louvre accord, 256, 301 market price of, 20, 38, 39, 384
Portfolio, 24-89, 121, 172- 178,381-399 409
efficienthefficient, 26 measures of, 45, 394, 404-408
market, 24, 40, 44, 73, 121, 178, 381, 399 reinvestment, 214
optimal, 22, 35 risk averse, 3-24, 55, 58, 86, 87
Portfolio balance model (PBM), 296-298 140, 181, 185, 199, 203, 27
Portfolio diversification, 22, 25 -31 391-405
Predictability, 122, 184, 358, 361-372 risk lover, 10-20
Preferred habitat hypothesis, 208, 219, 223 risk neutral, 10-20, 76, 82-87,
Present value (PV) (see discounted present 242, 261-305, 334, 342, 40
risk premium, 7, 214-232, 237,
value)
245-253, 272-279, 289, 33
Price competitiveness, 255
375-390,402-411
Price index, 128, 139, 267, 384
svstematichnsvstematic. 41 -43
Principle agent problem, 20 . ,
d
Separation principle, 16, 20, 23, 37, 50, 53 403, 404
Short termism, 98, 113, 185-190, 204 Trend
Single index model (SIM), 67-69, 204 deterministic, 139, 143, 144, 16
Small fr effect, 170, 173 426, 435
im
Smart money, 169, 173-204, 243, 303-307, stochastic, 143, 415, 425, 426,
377, 380,388-389
Spread, 226-245, 309-333, 348, 350, 402-411
Spurious regression, 426, 434 Utility, 3, 10-20, 55, 58, 84-88,
Stability, 353, 430, 438 391-394
Standard and P w r s composite share index,
122, 123, 128-130, 161-166, 357, 359,
380-382 Value line investment survey (VLI
Standard deviation ratio, 138, 139, 325, 350, VAR, 227, 268, 286, 287, 298, 30
353, 354 402, 428-438, 449
Stationarity, 141, 142, 162, 193, 418-437 advantageldisadvantage, 323-32
Statistical model, 417, 431, 432 cross equation restriction, 309-
Sticky price monetary model, 290-303 336-342, 350
Stock return predictability, 122- 134, 184, multivariate, 339, 365
353- 357 Variance conditionaVunconditiona1
Stock market, 116-156, 176, 351, 377 373, 383-389, 402, 405-413
Stock price, 116-155, 344-373, 380-390 438, 439, 442
Structural model, 431-438 Variance bounds test, 116, 136, 13
Sunspots, 156 208, 215, 226-234, 246-249
344, 351, 360, 361, 368
Variance decomposition, 352, 365
Takeover, 19, 93, 98, 105, 113, 148, 149, 186, Variance ratio, 116, 117, 125, 138
188, 202-204 160, 178, 229, 246, 248, 309
Tax, 52-54, 72, 73, 97, 99, 169, 170, 189, 324-330,337,353-361
271,401 Variance-covariance matrix (see m
Term premium (see risk premium) VARMA model, 428-437
Term structure, 5-7, 209, 216-230, 249, 251, Volatility, 134- 146, 169, 178, 183
312, 315-340, 345, 348, 402-414, 437 249, 258, 279-282,300, 327
empirical evidence, 234-253 404,406, 413
Term to maturity, 213, 214, 226, 247-250, Volatility tests (see variance boun
402,408,409
Terms of trade, 292
Time series
Wald test, 315-361
stationaryhon-stationary,419, 425, 426, 434
Weekend effect, 96, 123, 169, 170
univariate/multivariate,415, 417-438
White noise, 143, 274, 275, 334, 3
Time varying
419,427-429,437,446-449
beta, 402, 406
Winner™s curse, 172, 173
discount rate, 140, 346, 348, 354, 368
Wold™s decomposition theorem, 42
real interest rates, 139
risk/term premia, 152, 209, 219-222,
227-231, 246-249,276, 277, 342-348,
Yield (see interest rate)
355, 375-377, 387-391,401-414,438
dividend, 348, 387, 388
variances/covariances, 221, 368, 375, 376,
spot, 7, 212, 213, 223-234
383,387-390, 398-401,409-415,442
Yield curve, 7, 207, 226, 231, 250
Tobin™s risk aversion model, 54-57
Yield spread (see spread)
Trading rule (see trading strategy), 124,
Yield to maturity, 8, 208-217, 22
130-135, 202, 309, 380, 385
240, 246, 249, 402
Transformation line, 25, 33-36, 55

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