1;Acknowledgements;7 2;Table of Contents;9 3;1 Introduction;13 4;2 Basic Probability Theory and Markov Chains;17 4.1;2.1 Random Variables;17 4.2;2.2 Function of Random Variable;19 4.3;2.3 Normal Random Variable;20 4.4;2.4 Lognormal Random Variable;21 4.5;2.5 Markov Chains;22 4.6;2.6 Passage Time;26 4.7;2.7 Examples and Exercises;28 4.8;References;29 5;3 Estimation Techniques;31 5.1;3.1 Models, Parameters and Likelihood - An Overview;31 5.2;3.2 Maximum Likelihood Estimation and Covariance Matrix of Parameters;32 5.3;3.3 MLE Example - Classical Linear Regression;34 5.4;3.4 Dependent Observations;35 5.5;3.5 Prediction Error Decomposition;36 5.6;3.6 Serially Correlated Errors - Overview;37 5.7;3.7 Constrained Optimization and the Covariance Matrix;39 5.8;3.8 Examples and Exercises;40 5.9;References;41 6;4 Non-Parametric Method of Estimation;43 6.1;4.1 Background;43 6.2;4.2 Non-Parametric Approach;44 6.3;4.3 Kernel Regression;45 6.4;4.4 Illustration 1 (EViews);47 6.5;4.5 Optimal Bandwidth Seiection;48 6.6;4.6 Illustration 2 (EViews);48 6.7;4.7 Examples and Exercises;50 6.8;References;51 7;5 Unit Root, Cointegration and Related Issues;53 7.1;5.1 Stationary Process;53 7.2;5.2 Unit Root;56 7.3;5.3 Dickey-Fuller Test;58 7.4;5.4 Cointegration;61 7.5;5.5 Residual-based Cointegration Test;62 7.6;5.6 Unit Root in a Regression Model;63 7.7;5.7 Application to Stocic Markets;64 7.8;References;66 8;6 VAR Modeling;67 8.1;6.1 Stationary Process;67 8.2;6.2 Granger Causality;69 8.3;6.3 Cointegration and Error Correction;71 8.4;6.4 Johansen Test;73 8.5;6.5 LA-VAR;74 8.6;6.6 Application to Stocic Prices;76 8.7;References;77 9;7 Time Varying Volatility Models;79 9.1;7.1 Background;79 9.2;7.2 ARCH and GARCH Models;80 9.3;7.3 TGARCH and EGARCH Models;83 9.4;7.4 Causality-in-Variance Approach;86 9.5;7.5 Information Flow between Price Change and Trading Volume;89 9.6;References;93 10;8 State-Space Models (I);95 10.1;8.1 Background;95 10.2;8.2 Classical Regression;95 10.3;8.3 Important Time Series Processes;98 10.4;8.4 Recursive Least Squares;101 10.5;8.5 State-Space Representation;103 10.6;8.6 Examples and Exercises;106 10.7;References;115 11;9 State-Space Models (II);117 11.1;9.1 Likelihood Function Maximization;117 11.2;9.2 EM Algorithm;120 11.3;9.3 Time Varying Parameters and Changing Conditional Variance (EViews);123 11.4;9.4 GARCH and Stochastic Variance Model for Exchange Rate (EViews);125 11.5;9.5 Examples and Exercises;128 11.6;References;138 12;10 Discrete Time Real Asset Valuation Model;139 12.1;10.1 Asset Price Basics;139 12.2;10.2 Mining Project Background;141 12.3;10.3 Example 1;142 12.4;10.4Example2;143 12.5;10.5 Example 3;145 12.6;10.6 Example4;147 12.7;Appendix;150 12.8;References;152 13;11 Discrete Time Model of Interest Rate;153 13.1;11.1 Preliminaries of Short Rate Lattice;153 13.2;11.2 Forward Recursion for Lattice and Elementary Price;157 13.3;11.3 Matching the Current Term Structure;160 13.4;11.4 Immunization: Application of Short Rate Lattice;161 13.5;11.5 Valuing Callable Bond;164 13.6;11.6 Exercises;165 13.7;References;166 14;12 Global Bubbles in Stock Markets and Linkages;167 14.1;12.1 Introduction;167 14.2;12.2 Speculative Bubbles;168 14.3;12.3 Review of Key Empirical Papers;170 14.3.1;12.3.1 Flood and Garber (1980);170 14.3.2;12,3.2 West (1987);172 14.3.3;12.3.3 Ikeda and Shibata (1992);173 14.3.4;12.3.4 Wu (1997);175 14.3.5;12.3.5 Wu (1995);176 14.4;12.4 New Contribution;176 14.5;12.5 Global Stock Market Integration;177 14.6;12.6 Dynamic Linear Models for Bubble Solutions;179 14.7;12.7 Dynamic Linear Models for No-Bubble Solutions;184 14.8;12.8 Subset VAR for Linkages between Markets;186 14.9;12.9 Results and Discussions;187 14.10;12.10 Summary;198 14.11;References;199 15;13 Forward FX Market and the Risk Premium;205 15.1;13.1 Introduction;205 15.2;13.2 Alternative Approach to Model Risk Premia;207 15.3;13.3 The Proposed Model;208 15.4;13.4 State-Space Framework;213 15.5;13.5 Brief Description of Wolff/Cheung Model;216 15.6;1