Extrapolative statistical models

Extrapolative statistical models are models that attempts to use past trends in data in order to predict future trends. This may be used in any number of business or non-business situations. They are the models that apply a formula to historical data and project results for a future period. Such models include the simple linear trend model, the simple exponential model, and the simple autoregressive model.

The technical analysts commonly use extrapolative statistical models in order to predict future prices of securities. This can be quite important in the futures and option markets.

Variable-rate mortgage

A variable-rate mortgage or adjustable-rate mortgage (ARM) is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender's standard variable rate/base rate. There may be a direct and legally defined link to the underlying index, but where the lender offers no specific link to the underlying market of index they can choose to increase or decrease at their discretion. The term "variable-rate mortgage" is most common outside the United States, whilst in the United States, "adjustable-rate mortgage" is most common, and implies a mortgage regulated by the Federal government,  with limitations on charges ("caps"). In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.

Adjustable rate mortgage is a mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or margin, over the index, usually subject to per-interval and to life-of-loan interest rate and/or payment rate caps.

Holding period return

Holding period return (HPR) is the total return on an asset or portfolio over the period during which it was held. It is one of the simplest measures of investment performance.

HPR is the percentage by which the value of a portfolio (or asset) has grown for a particular period. It is the sum of income and capital gains divided by the initial period value (asset value at the beginning of the period).

HPR = ((Present Value, or face Value, End-Of-Period Value) + (Any Intermediate Gains eg. Dividends) - (Initial Value)) /(Initial Value)

HPR_n = Income + (P_n+1 – P_n)/ P_n

Annualized holding period return is the annual rate of return that when compounded t times, would have given the same t-period holding return as actually occurred from period 1 to period t.

Quality spread

Quality spread is, the spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating. For instance, the difference between yields on Treasuries and those on single A-rated industrial bonds. It is also called credit spread. 

In an interest rate swap quality spread differential is the difference between the interest rates of debt obligations offered by two parties of different creditworthiness that engage in the swap. A swap transaction is considered beneficial to both parties only when the QSD is positive.

J-curve

The term J-curve is used in several different fields to refer to a variety of unrelated J-shaped diagrams where a curve initially falls, but then rises to higher than the starting point.

In private equity, the J curve is used to illustrate the historical tendency of private equity funds to deliver negative returns in early years and investment gains in the outlying years as the portfolios of companies mature.

In economics, the 'J curve' refers to the trend of a country’s trade balance following a devaluation or depreciation under a certain set of assumptions. A devalued currency means imports are more expensive, and on the assumption that the volume of imports and exports change little immediately, this causes a depreciation of the current account (a bigger deficit or smaller surplus). After some time, though, the volume of exports may start to rise because of their lower more competitive prices to foreign buyers, and domestic consumers may buy fewer of the costlier imports. Eventually, if this happens, the trade balance may improve on what it was before the devaluation. If there is a currency revaluation or appreciation the same reasoning leads to an inverted J-curve.