Elements of Financial Risk Management, 2nd Edition

3. A Primer on Financial Time Series Analysis

This chapter serves two purposes: First, it gives a very brief refresher on the basic concepts in probability and statistics, and introduces the bivariate linear regression model. Second, it gives an introduction to time series analysis with a focus on the models most relevant for financial risk management. An important goal of the second part of the chapter is to ensure that the reader avoids some common pitfalls encountered by risk managers working with time series data such as prices and returns. These pitfalls can be summarized as: (1) Spurious detection of mean-reversion, (2) spurious significance in regressions, and (3) spurious detection of causality.

Keywords: Probability, distributions, moments, ...