Systematic modeling of white noise with financial time series in decision making
Abstract
n this study real non - diversifiable (systematic) risk is derived. This risk together
with diversifiable (non - systematic) risk is weighted against expectedreturns of certain
assets to determine maximum returns of these assets at minimum risk. A Real
Risk WeightedPricing Model (RRWPM) is thus developed whichis able to postulate
expected returns and risks of assets in the past and in the near future. This enables
discounting rates and costs of capitalto be accuratelydetermined. Decisionscan also
be madebased on the point estimators determinedfor exampleexpected returns and
total risks of assets obtained.
Finite investment decision making using real market risk (Non-diversifiable risk) is
then undertaken. The Non-diversifiable risks estimates of a portfolio of stocks as determined
by the RRWPM are used as initial data. The variance of non-diversifiable
risk is estimated as a random variable referred to as random error (white noise).
Theestimator is used to calculateestimates of white noise. A curveestimation of the
whitenoiseismadeusingKerneldensityestimation. Thisisusedtoderiveprobability
estimates of the non-diversifiable risks of the various stocks. This enable comparison
among the portfolio of stocks and propagates good decision making.
Actual future market risks (systematic or non-diversifiable) of investment portfolios
are then determined. Future returns are forecasted using past returns and GARCH
(Generalized Autoregressive Conditional Heteroskedastic) models. RRWPM is used
to estimate future systematic risk among other point estimators and determines the
future costs of the portfolios. Forecasted random error is then calculated as a random
variable and used to determine probability density estimates of systematic risk.
This enables future actual market risks of portfolio investments to be derived hence
facilitating proper future investment decision making
Citation
Doctor Of Philosophy In Mathematical StatisticsPublisher
University of Nairobi