Frank J. Fabozzi 
Encyclopedia of Financial Models, Volume II 

Volume 2 of the Encyclopedia of Financial
Models

The need for serious coverage of financial modeling has never
been greater, especially with the size, diversity, and efficiency
of modern capital markets. With this in mind, the Encyclopedia
of Financial Models has been created to help a broad spectrum
of individuals–ranging from finance professionals to
academics and students–understand financial modeling and make
use of the various models currently available.

Incorporating timely research and in-depth analysis, Volume
2 of the Encyclopedia of Financial Models covers both
established and cutting-edge models and discusses their real-world
applications. Edited by Frank Fabozzi, this volume includes
contributions from global financial experts as well as academics
with extensive consulting experience in this field. Organized
alphabetically by category, this reliable resource consists of
forty-four informative entries and provides readers with a balanced
understanding of today’s dynamic world of financial modeling.

* Volume 2 explores Equity Models and Valuation, Factor
Models for Portfolio Construction, Financial Econometrics,
Financial Modeling Principles, Financial Statements Analysis,
Finite Mathematics for Financial Modeling, and Model Risk
and Selection

* Emphasizes both technical and implementation issues, providing
researchers, educators, students, and practitioners with the
necessary background to deal with issues related to financial
modeling

* The 3-Volume Set contains coverage of the fundamentals and
advances in financial modeling and provides the mathematical and
statistical techniques needed to develop and test financial
models

Financial models have become increasingly commonplace, as well
as complex. They are essential in a wide range of financial
endeavors, and the Encyclopedia of Financial Models will
help put them in perspective.

Table of Content

Volume II

Equity Models and Valuation 1

Dividend Discount Models 3

Discounted Cash Flow Methods for Equity Valuation 15

Relative Valuation Methods for Equity Analysis 33

Equity Analysis in a Complex Market 47

Equity Portfolio Selection Models in Practice 61

Basics of Quantitative Equity Investing 89

Quantitative Equity Portfolio Management 107

Forecasting Stock Returns 121

Factor Models for Portfolio Construction 135

Factor Models 137

Principal Components Analysis and Factor Analysis 153

Multifactor Equity Risk Models and Their Applications 171

Factor-Based Equity Portfolio Construction and Analysis 195

Cross-Sectional Factor-Based Models and Trading Strategies 213

The Fundamentals of Fundamental Factor Models 243

Multifactor Equity Risk Models and Their Applications 255

Multifactor Fixed Income Risk Models and Their Applications 267

Financial Econometrics 293

Scope and Methods of Financial Econometrics 295

Regression Analysis: Theory and Estimation 305

Categorical and Dummy Variables in Regression Models 333

Quantile Regression 353

ARCH/GARCH Models in Applied Financial Econometrics 359

Classification and Regression Trees and Their Use in Financial Modeling 375

Applying Cointegration to Problems in Finance 383

Nonlinearity and Nonlinear Econometric Models in Finance 401

Robust Estimates of Betas and Correlations 437

Working with High-Frequency Data 449

Financial Modeling Principles 465

Milestones in Financial Modeling 467

From Art to Financial Modeling 479

Basic Data Description for Financial Modeling and Analysis 485

Time Series Concepts, Representations, and Models 501

Extracting Risk-Neutral Density Information from Options Market Prices 521

Financial Statement Analysis 529

Financial Statements 531

Financial Ratio Analysis 545

Cash-Flow Analysis 565

Finite Mathematics for Financial Modeling 579

Important Functions and Their Features 581

Time Value of Money 595

Fundamentals of Matrix Algebra 621

Difference Equations 629

Differential Equations 643

Partial Differential Equations in Finance 659

Model Risk and Selection 689

Model Risk 691

Model Selection and Its Pitfalls 699

Managing the Model Risk with the Methods

of the Probabilistic Decision Theory 719

Fat-Tailed Models for Risk Estimation 731

About the author

Frank J. Fabozzi is editor of the Journal of Portfolio Management and an Adjunct Professor of Finance at Yale University’s School of Management. Frank is a Chartered Financial Analyst and Certified Public Accountant. He is on the board of directors of the Guardian Life family of funds and the Black Rock complex of funds. He earned a doctorate of economics from the City University of New York in 1972 and in 1994 received an honorary doctorate of Human Letters from Nova Southeastern University. Frank is a Fellow of the International Center for Finance at Yale University.