Highlights of the blog over the past year.
See also “Blog year 2010 in review”.
Most popular posts
The posts with the most hits during the year.
- 4 and a half myths about beta in finance
- A tale of two returns (posted in 2010)
- The number 1 novice quant mistake
- What the hell is a variance matrix? (posted in 2010)
- On “Stock correlations have been rising”
- The R Inferno revised
- Factor models of variance in finance
- Testing an S&P 500 prediction
- Solve your R problems
- The volatility mystery continues
Most under-valued posts
The things that are good for us — like eating spinach — are the things that we tend to avoid most. Here are five topics from the past year that I think have the potential to move the fund management industry in a positive direction:
- Consider implementing pension insurance
- Switch to useful performance measurement
- Use risk models wisely
- Move away from short-termism
- If you are active, understand your edge
Table 1 summarizes (and has links to) the reviews of books during the year.
Table 1: Recommendations of reviewed books.
|Risk and Meaning||Nicolas Bouleau||for some|
|23 Things They Don’t Tell You about Capitalism||Ha-Joon Chang||yes|
|Future Babble||Dan Gardner||highly|
|Numerical Methods and Optimization in Finance||Manfred Gilli, Dietmar Maringer, Enrico Schumann||I suspect so|
|Expected Returns||Antti Ilmanen||yes|
|Smart Swarm||Peter Miller||yes|
|R Graphs Cookbook||Hrishi Mittal||mostly|
|Saving Capitalism from Short-Termism||Alfred Rappaport||yes|
|Everything is Obvious*||Duncan Watts||highly|
There were two posts concerned with Con Keating’s call for pension insurance. This is an idea that isn’t in much favor in the English-speaking world, but perhaps should be.
I mused about the possibility of fund management capturing some of the money that is currently gambled away in “An investment lottery”.
- Boris the banker explains efficient markets
- A field guide to market participants
- Solve your R problems
- The carry trade — almost wordless
Performance will most probably be the major use of random portfolios at some point. The post “Finding good active managers” explains why it would be better for that point to be sooner rather than later.
A refinement of the technique is reported in “Performance measurement is about decisions”.
The hottest quant topic was on variance compression. That is, that in recent times volatility estimates of the S&P 500 using multiple-day returns are “too small” relative to estimates based on one-day returns. There’s something happening there, but we don’t know what it is.
There was a post urging more understanding and less use of beta. There was also a couple of posts about what happens when portfolios are constrained to have beta equal to one, and at least one other post about beta.
Quantitative finance depends on data sources. A largely untapped data source is news analytics.
Another series of posts suggest that weight constraints should often be replaced by constraints on variance fractions. This can be done at the individual asset level but probably more usefully at a higher level. Constraining sector fractions of variance is really what we are aiming at when we impose sector weight constraints. A specific use of the idea of risk fraction is in risk parity portfolios.
Stock correlations were investigated. The sell-off in early August seemed to display a bit of a disconnect between the major American indices and typical constituents of the S&P 500. An index is merely a trading strategy made official.
Low volatility investing made a few appearances.
The asynchrony of market opening hours can cause problems. The problems and remedies were discussed.
The good news and the bad news of the predictability of skewness and kurtosis.
Winsorization was explained.
Surprisingly the Halloween indicator slash “go away in May” seems to have some reality to it (see the first comment, but why would there be such an effect?).
An introductory look at why continuously compounded returns are connected to natural logarithms.
There was also a look at performance ratios when return variances are infinite.
useR!2011 inspired three posts.
Also there was a particular post that I think is a great example of some of the power of R.
Danielsson and Macrae wrote a short and highly recommended piece on the appropriate use of risk models. They aim at both practitioners and regulators.
Engineering has the concept of a normal accident. This is the idea that a complex, highly interrelated system will go bad. Often attempts to make the system safer just make it more complex and more likely to break. You can get more about this in Tim Harford’s wonderful Adapt.
Normal accidents imply the Book of Doom.
A quite clever — I think — idea is to do premortem stress tests. When a project is in development, each member of the team is required to state how the project will have failed given that it has failed. The trick is to force people to think of failure seriously and to avoid ego problems.
He was an accident waiting to happen
Most accidents happen at home
Maybe he should’ve gone out more often
Porcelain Monkey by Warren Zevon and Jorge Calderon
To an Athlete Dying Young
The time you won your town the race
We chaired you through the market-place;
To an Athlete Dying Young by A. E. Housman
Lawyers, Guns and Money
I was gambling in Havana
I took a little risk
from Lawyers, Guns and Money by Warren Zevon
Long Way Home
Money’s just something you throw
Off the back of a train
from Long Way Home by Tom Waits and Kathleen Brennan
Time is a Lion
But time is a story and there will be more
From Time is a Lion by Joe Henry
Just a Bum
He will tell ya it wasn’t always this way
One bad little thing happened one bad little day
from Just a Bum by Greg Brown
Stairway to Heaven
Yes, there are two paths you can go by, but in the long run
There’s still time to change the road you’re on
from Stairway to Heaven by Led Zeppelin
She said “I got a plan
Listen, Sam, how’d ya like to make some easy money ? ”
He say, “yes! oh yes!
from “Easy Money” by Rickie Lee Jones
The Wonderful Wizard
Just like a homeless, that hangs around your home
Or a mother who’d give away her own
from “The Wonderful Wizard” by Guggenheim Grotto
Deep Dark Truthful Mirror
You’re spellbound baby there’s no doubting that
Did you ever see a stare like a Persian cat?
from “Deep Dark Truthful Mirror” by Declan MacManus
For my next trick I’ll need a voluteer
I can saw a woman in two
But you won’t want to look in the box when I do
from “For my next trick I’ll need a volunteer” by Warren Zevon
1952 Vincent Black Lightning
Red hair and black leather my favourite colour scheme
from “1952 Vincent Black Lightning” by Richard Thompson
Throw yourself in the midst of danger but keep one eye open at night
Handcuffed to a Fence in Mississippi
things is always better than they seem
from “Handcuffed to a Fence in Mississippi” by Jim White
Things That Scare Me
Same birds that followed me
To school when I was young
Were they trying to tell me something?
Were they tellin’ me to run?
from “Things That Scare Me” by Neko Case and Tom Ray
Down the Mountain
Who would take the repercussions when the bottle is to blame?
from “Down the Mountain” by Robin E. Contreras
Why not think about times to come
from “Don’t Stop” by Christine McVie
Two Tramps in Mud Time
You know how it is with an April day
When the sun is out and the wind is still,
You’re one month on in the middle of May.
from “Two Tramps in Mud Time” by Robert Frost
Ballad of a Thin Man
And something is happening here
But you don’t know what it is
Do you, Mister Jones ?
from “Ballad of a Thin Man” by Bob Dylan
And all I ever learned from love
Was how to shoot someone who outdrew ya
from “Hallelujah” by Leonard Cohen
(Looking for) The Heart of Saturday Night
Tryin’ to wipe out every trace
Of all the other days in the week
You know that this’ll be the Saturday you’re reachin’ your peak
from “(Looking for) The Heart of Saturday Night” by Tom Waits
I’d like to thank those who have read the blog over the past year (and beyond). Special thanks go to those who
All the best in the coming year.