Unveiling the Financial Market: Data, Definitions, and Modeling Techniques

In this book, we will present and apply methods speci¿cally designed to model the ¿nancial market, but, before starting to discuss the models, we need to make a brief introduction to the data that we will be working with. Our data consists on ¿nancial asset prices from several stock exchanges, with special attention to the New York Stock Exchange, the London Stock Exchange and the Lisbon Stock Exchange. Also, we focused on stock and forex (foreign exchange market) prices, because these present higher volatility and volume (i.e., more trades), and the data related to these assets is easier to obtain. Here, volatility is a statistical measure of the dispersion of returns for a given ¿nancial asset. It is often measured as either the standard deviation or variance between returns from that same asset. Moving further we will often use the terms ¿stock exchange¿ and ¿¿nancial market¿ interchange-ably, but they slightly di¿er. The term ¿¿nancial market¿ broadly refers to any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others, whilst the ¿stock exchange¿ is a facility where stockbro-kers and traders can buy and sell securities, such as shares of stock, bonds and other ¿nancial instruments. However, whenever we refer to the ¿nancial market we will be referring to the stock exchange.