Parameter
What is Parameter? A parameter is a useful component of statistical analysis. It refers to the characteristics that are used to define a given population. It is used to describe a specific characteristic of the entire population. When making an inference about the population, the parameter is unknown because it would be impossible to collect...
Normal Distribution
What is Normal Distribution? The normal distribution is also referred to as the Gaussian or Gauss distribution. The distribution is widely used in natural and social sciences. It is made relevant by the Central Limit Theorem, which states that the averages obtained from independent, identically distributed random variables tend to form normal distributions, regardless of...
Binomial Distribution
What is Binomial Distribution? Binomial distribution is a common probability distribution that models the probability of obtaining one of two outcomes under a given number of parameters. It summarizes the number of trials when each trial has the same chance of attaining one specific outcome. The value of a binomial is obtained by multiplying the...
Clustering Illusion
What is Clustering Illusion? Clustering illusion refers to a cognitive bias in behavioral finance in which an investor observes patterns in what are actually random events. In other words, clustering illusion bias is the bias that arises from seeing a trend in random events that occur in clusters that are actually random events. The clustering...
Cluster Sampling
What is Cluster Sampling? In statistics, cluster sampling is a sampling method in which the entire population of the study is divided into externally, homogeneous but internally, heterogeneous groups called clusters. Essentially, each cluster is a mini-representation of the entire population. After identifying the clusters, certain clusters are chosen using simple random sampling while the...
Empirical Evidence
What is Empirical Evidence? Empirical evidence is the information obtained through observation and documentation of certain behavior and patterns or through an experiment. Empirical evidence is a quintessential part of the scientific method of research that is applicable in many disciplines. In the scientific method, the pieces of empirical evidence are used to validate or...
Coefficient of Determination
What is the Coefficient of Determination? The coefficient of determination (R² or r-squared) is a statistical measure in a regression model that determines the proportion of variance in the dependent variable that can be explained by the independent variable. In other words, the coefficient of determination tells one how well the data fits the model...
Cross-Sectional Data Analysis
What is Cross-Sectional Data Analysis? Cross-sectional data analysis is when you analyze a data set at a fixed point in time. Surveys and government records are some common sources of cross-sectional data. The datasets record observations of multiple variables at a particular point in time. Understanding Cross-Sectional Data Analysis in Finance Financial analysts may, for example,...
Level of Measurement
What is Level of Measurement? In statistics, level of measurement is a classification that relates the values that are assigned to variables with each other. In other words, level of measurement is used to describe information within the values. Psychologist Stanley Smith is known for developing four levels of measurement: nominal, ordinal, interval, and ratio....
Arbitrage Free Term Structure Models
What are Arbitrage Free Term Structure Models? Arbitrage Free Term Structure Models (also known as No-Arbitrage Models) are used to generate the true stochastic interest rate generating process by using real market data. Unlike equilibrium term structure models, which make certain assumptions about the true interest rate generating process to determine the correct theoretical term...
