Book Image

Introduction to R for Quantitative Finance

Book Image

Introduction to R for Quantitative Finance

Overview of this book

Introduction to R for Quantitative Finance will show you how to solve real-world quantitative fi nance problems using the statistical computing language R. The book covers diverse topics ranging from time series analysis to fi nancial networks. Each chapter briefl y presents the theory behind specific concepts and deals with solving a diverse range of problems using R with the help of practical examples.This book will be your guide on how to use and master R in order to solve quantitative finance problems. This book covers the essentials of quantitative finance, taking you through a number of clear and practical examples in R that will not only help you to understand the theory, but how to effectively deal with your own real-life problems.Starting with time series analysis, you will also learn how to optimize portfolios and how asset pricing models work. The book then covers fixed income securities and derivatives such as credit risk management.
Table of Contents (17 chapters)
Introduction to R for Quantitative Finance
Credits
About the Authors
About the Reviewers
www.PacktPub.com
Preface
Index

Chapter 3. Asset Pricing Models

Covered in this chapter are the problem of absolute pricing (Cochrane 2005) and how the value of assets with uncertain payments is determined based on their risk. Chapter 2, Portfolio Optimization, modeled the decision-making of an individual investor based on the analysis of the assets' return in a mean variance framework. This chapter focuses on whether or not equilibrium can exist in financial markets, what conditions are needed, and how it can be characterized. Two main approaches—Capital Asset Pricing Model and Arbitrage Pricing Theory—will be presented, which use completely different assumptions and argumentation, but give similar descriptions of the return evolution.

According to the concept of relative pricing, the riskiness of the underlying product is already involved in its price and, so, it does not play any further role in the pricing of the derived instrument; this will be presented in Chapter 6, Derivatives Pricing. The no-arbitrage argument...