Sergio M. Focardi & Petter N. Kolm 
Financial Modeling of the Equity Market 
From CAPM to Cointegration

An inside look at modern approaches to modeling equity
portfolios

Financial Modeling of the Equity Market is the
most comprehensive, up-to-date guide to modeling equity portfolios.
The book is intended for a wide range of quantitative analysts,
practitioners, and students of finance. Without sacrificing
mathematical rigor, it presents arguments in a concise and clear
style with a wealth of real-world examples and practical
simulations. This book presents all the major approaches to
single-period return analysis, including modeling, estimation, and
optimization issues. It covers both static and dynamic factor
analysis, regime shifts, long-run modeling, and cointegration.
Estimation issues, including dimensionality reduction, Bayesian
estimates, the Black-Litterman model, and random coefficient
models, are also covered in depth. Important advances in
transaction cost measurement and modeling, robust optimization, and
recent developments in optimization with higher moments are also
discussed.

Sergio M. Focardi (Paris, France) is a founding partner
of the Paris-based consulting firm, The Intertek Group. He is a
member of the editorial board of the Journal of Portfolio
Management. He is also the author of numerous articles and books on
financial modeling. Petter N. Kolm, Ph D (New Haven, CT and New
York, NY), is a graduate student in finance at the Yale School of
Management and a financial consultant in New York City. Previously,
he worked in the Quantitative Strategies Group of Goldman Sachs
Asset Management, where he developed quantitative investment models
and strategies.

Table of Content

Preface.

Acknowledgments.

About the Authors.

Chapter 1. Introduction.

PART ONE: PORTFOLIO ALLOCATION: CLASSICAL THEORY AND MODERN
EXTENSIONS.

Chapter 2. Mean-Variance Analysis and Modern Portfolio
Theory.

Chapter 3. Transaction and Trading Costs.

Chapter 4. Applying the Portfolio Selection Framework in
Practice.

Chapter 5. Incorporating Higher Moments and Extreme Risk
Measures.

Chapter 6. Mathematical and Numerical Optimization.

PART TWO: MANAGING UNCERTAINTY IN PRACTICE.

Chapter 7. Equity Price Models.

Chapter 8. Forecasting Expected Return and Risk.

Chapter 9. Robust Frameworks for Estimation and Portfolio
Allocation.

PART THREE: DYNAIC MODELS FOR EQITY PRICES.

Chapter 10. Feedback and Predictors in Stock Markets.

Chapter 11. Individual Price Processes: Univariate Models.

Chapter 12. Multivariate Models.

Chapter 13. Model Selection and its Pitfalls.

PART FOUR: MODEL ESTIMATION AMD RISK MITIGATION.

Chapter 14. Estimation of Regression Models.

Chapter 15. Estimation of Linear Dynamic Models.

Chapter 16. Estimation of Hidden Variable Models.

Chapter 17. Model Risk and its Mitigation.

Appendix A: Differences Equations.

Appendix B: Correlations, Regressions, and Copulas/

Appendix C: Data Description.

Index.

About the author

FRANK J. FABOZZI, PHD, CFA, CPA, is the Frederick Frank Adjunct
Professor of Finance at Yale University’s School of Management and
a Fellow of the International Center for Finance. Prior to joining
the Yale faculty, Fabozzi was a visiting professor of finance in
the Sloan School of Management at MIT. Fabozzi is the Editor of the
Journal of Portfolio Management.

Sergio M. Focardi is a founding partner of the Paris-based
consulting firm, The Intertek Group. He consults on, trains on, and
implements quantitative financial models. He is also a member of
the editorial board of the Journal of Portfolio Management and
author of numerous articles and books on financial modeling.

Petter N. Kolm, PHD, is a doctoral student in finance at Yale
University’s School of Management and a financial consultant in New
York City. Previously, he worked in the Quantitative Strategies
group at Goldman Sachs Asset Management where he developed
quantitative investment models and strategies.