Overview of Quantitative Finance
and Risk Management Research
By
Dr. Cheng-Few Lee
Distinguished Professor, Rutgers University, USA
Distinguished Professor, National Chiao Tung University, Taiwan
Editor, Review of Quantitative Finance and Accounting
Editor, Review of Pacific Basin Financial Markets and Policies
Overview of Quantitative Finance
and Risk Management Research
Abstract
Based upon theoretical framework of
finance, policy framework of finance, and
research methods of quantitative finance
and risk management, this paper will
reviews, and discusses the overview of i)
portfolio theory and investment analysis, ii)
options and option pricing theory, and iii)
risk management. In addition, research
topics in quantitative finance and risk
management will be suggested.
Overview of Quantitative Finance
and Risk Management Research
Chapter A. Theoretical Framework of
Finance
 Chapter B. Investment, Dividend,
Financing, and Production Policies:
Theory and Implications
 Chapter C. Research Methods in
Quantitative Finance and Risk
Management

Chapter A. Theoretical Framework of
Finance
A.1 INTRODUCTION
A.2 DISCOUNTED CASH-FLOW VALUATION THEORY
BOND VALUATION
Perpetuity
Term Bonds
COMMON-STOCK VALUATION
A.3 M AND M VALUATION THEORY
Review and Extension of M and M Proposition I
Miller’s Proposition on Debt and Taxes
A.4 Markowitz Portfolio Theory
A.5 CAPITAL ASSET PRICING MODEL (CAPM)
A.6 Arbitrage Pricing Theory
Ross’s Arbitrage Model Specification
Chapter A. Theoretical Framework of
Finance
A.7 OPTION VALUATION
A.8 Futures Valuation and Hedging
FUTURES MARKETS: OVERVIEW
THE VALUATION OF FUTURES CONTRACTS
The Arbitrage Argument
Interest Costs
Carrying Costs
Supply and Demand Effects
The Effect of Hedging Demand
HEDGING CONCEPTS AND STRATEGIES
Hedging Risks and Costs
The Johnson Minimum-Variance Hedge Strategy
The Howard-D’Antonio Optimal Risk-Return Hedge Strategy
A.9 CONCLUSION
Chapter B. Investment, Dividend, Financing,
and Production Policies: Theory and
Implications
B.1 INTRODUCTION
B.2 INVESTMENT AND DIVIDEND INTERACTIONS: THE INTERNAL-VERSUSEXTERNAL FINANCING DECISION
Internal Financing
External Financing
B.3 INTERACTIONS BETWEEN DIVIDEND AND FINANCING POLICIES
Cost of Equity Capital and Dividend Policy1
Default Risk and Dividend Policy
B.4 INTERACTIONS BETWEEN FINANCING AND INVESTMENT DECISIONS
Risk-free Debt Case
Risky Debt Case
B.5 IMPLICATIONS OF FINANCING AND INVESTMENT INTERACTIONS FOR
CAPITAL BUDGETING
Equity-Residual Method
After-Tax, Weighted-Average, Cost-of-Capital Method
The Arditti-Levy method is most similar to the after-tax weighted-average cost-of-capital
Arditti and Levy Method
Myers Adjusted-Present-Value Method
Chapter B. Investment, Dividend, Financing,
and Production Policies: Theory and
Implications
B.6 IMPLICATIONS OF DIFFERENT POLICIES ON THE BETA
COEFFICIENT
Impact of Financing Policy on Beta Coefficient Determination
Impact of Production Policy on Beta Coefficient Determination
Impact of Dividend Policy on Beta Coefficient Determination
B.7 CONCLUSION
Appendix I. STOCHASTIC DOMINANCE AND ITS APPLICATIONS TO
CAPITAL-STRUCTURE ANALYSIS WITH DEFAULT RISK
I.1 INTRODUCTION
I.2 CONCEPTS AND THEOREMS OF STOCHASTIC DOMINANCE
I.3 STOCHASTIC-DOMINANCE APPROACH TO INVESTIGATING THE
CAPITAL-STRUCTURE PROBLEM WITH DEFAULT RISK
I.4 SUMMARY
Chapter C. Research Methods in Quantitative
Finance and Risk Management
C.1 Introduction
C.2 Statistics
Binomial distribution
Multinomial distribution
Normal distribution
Log-normal distribution
Non-central Chi-square distribution
Factor analysis
Discriminant analysis
Bayesian inference
Stochastic dominance
Characteristics function
Spectrum analysis
Chapter C. Research Methods in Quantitative
Finance and Risk Management
C.3 Econometrics
Linear regression models
Time series modeling
Multiple equations models
Generalized methods of moments
Panel data models
ARM model
GARCH analyses
Defensive forecasting
Spline-GARCH
Dynamic econometric loss
Robust logistic regression
Chapter C. Research Methods in Quantitative
Finance and Risk Management
C.4 Mathematics
Equilibrium analysis
Optimization problems
Dynamic analysis
Itô calculus
Ordinary differential equation (ODE)
Fuzzy set theory
C.5 Other Disciplines
Operation research
Monte Carlo Markov Chain (MCMC) method
Entropy theory
Computer Science and Technology
C.6 Conclusion