May 29, 2016
When I announced R in Finance 2016 I talked about 2 days of conference and 50 speakers. I missed out the 3 days of sleep deprivation. But a pleasant [...]
April 16, 2016
Highlighted R in Finance 2016 May 20-21, Chicago. 2 days, limited space, 50 speakers, including: Pat Burns on "Some Linguistics of Quantitative Finance" Abstract: How can the abstract be written [...]
September 28, 2014
How Darwin and the doctor of King Charles I could turn economics into a science. Executive summary If you are confused by economics, then you should read this book. [...]
September 21, 2014
Conference The first EARL Conference (Effective Applications of the R Language) was held 2014 September 15-17 in London. Talk My talk was "Effective risk management with R" (annotated slides). [...]
July 28, 2014
Highlighted EARL As in "Effective Applications of the R Language". 2014 September 15-17, London. Somehow they gave higher billing to Ben Goldacre than to Pat Burns. If Obama were [...]
March 16, 2014
More efficiency and an additional function in the new version on CRAN. Variance estimation The major functionality in the package is variance estimation: Ledoit-Wolf shrinkage via var.shrink.eqcor statistical factor [...]
February 9, 2014
A data analysis surprise party. Simple question If I have correlation matrices each estimated with a month of daily returns, how much worse is the average of six of [...]
January 26, 2014
The question of skewness and kurtosis in portfolio optimization. Previously Problem 4 of "The top 7 portfolio optimization problems" concerns the use of higher moments. "Further adventures with higher [...]
January 19, 2014
Some facts and some speculation. Definition Volatility is the annualized standard deviation of returns -- it is often expressed in percent. A volatility of 20 means that there is [...]
January 13, 2014
An attempt to clarify the basics. Previously There have been several posts about garch. In particular: A practical introduction to garch modeling The components garch model in the rugarch [...]
January 6, 2014
The S&P 500 returned 29.6% in 2013. How might that have varied? S&P weights There are many features that could vary -- here we will keep the same constituents [...]
December 30, 2013
Highlights of the blog over the past year. Most popular posts The posts with the most hits during the year. A practical introduction to garch modeling (posted in 2012) A [...]
December 23, 2013
Additional views of the stability of skewness and kurtosis of equity portfolios. Previously A post called "Four moments of portfolios" introduced the idea of looking at the stability of [...]
December 16, 2013
The further adventures of returns on short positions. Previously There are three posts that are instructive about returns: A tale of two returns Returns with negative net asset values [...]
December 13, 2013
On Monday I gave a talk at the London Quant Group entitled "Exploring the efficacy of higher moments in portfolio optimisation". A substantial number of people showed up, and [...]
November 24, 2013
Highlighted London Quant Group 2013 December 9, London. Pat Burns on "Exploring the efficacy of higher moments in portfolio optimisation". Abstract: Typically portfolio optimisation only uses the first two moments [...]
November 18, 2013
Comparing the behavior of the two on the S&P 500. Previously There have been a few posts about Value at Risk (VaR) and Expected Shortfall (ES) including an introduction to Value [...]
November 11, 2013
I put off reading this book because I thought that I would already know most of its contents. I was wrong. Really wrong. There is a review with a [...]
November 8, 2013
Highlighted R for Finance Workshop A two-day course introducing R as applied to finance. 2013 December 3 & 4, London. Lead by Ron Hochreiter with appearances by Pat Burns and [...]
November 4, 2013
I recently had a frustrating -- for both parties -- conversation involving performance measurement. I said "measurement". My dialogist heard "calculation" but wanted "measurement". We went dizzy in the chase. [...]
November 1, 2013
Most popular posts in 2013 October On smart beta The look of verifying data Quant finance blogs A practical introduction to garch modeling (posted in 2012) The top 7 portfolio [...]
October 28, 2013
An interview with Russ Bubley: Russ is the founder of i for change, a social investment strategy consultancy working with charities, social enterprises, government and investor groups to bring [...]
October 22, 2013
What I've learned from updating the blogroll. New entries The easy option is to go to The Whole Street which aggregates lots of quant finance blogs. Somehow Bookstaber missed [...]
October 14, 2013
What good are the skewness and kurtosis of portfolios? Previously The post "Cross-sectional skewness and kurtosis: stocks and portfolios" looked at skewness and kurtosis in portfolios. The key difference [...]
October 7, 2013
Get data that fit before you fit data. Why verify? Garbage in, garbage out. How to verify The example data used here is daily (adjusted) prices of stocks. By [...]
September 30, 2013
A bit of perspective on a buzzword. The prompt The Axioma Quant Forum in London included a discussion of smart beta. I took two highlights from it: a point [...]
September 23, 2013
The subtitle is "Organizational Design, Risk, and Value Creation". Executive summary This should be a business book bestseller -- it simply and clearly explains the process of value creation. [...]
August 26, 2013
How does Value at Risk change through time for the same portfolio? Previously There has been a number of posts on Value at Risk, including a basic introduction to [...]
July 21, 2013
The impromptu summer holiday of the Portfolio Probe website has now ended. Some details remain before it is back to full strength. Sorry for any inconvenience.
June 16, 2013
Getting Expected Shortfall given the standard deviation or Value at Risk. Previously There have been a few posts about Value at Risk and Expected Shortfall. Properties of the stable [...]
June 10, 2013
A few basics about the stable distribution. Previously "The distribution of financial returns made simple" satirized ideas about the statistical distribution of returns, including the stable distribution. Origin As [...]
June 4, 2013
Highlighted Value at Risk and Expected Shortfall A two-day course exploring Value at Risk and Expected Shortfall, and their role in risk management. 2013 June 25 & 26, London. [...]
June 3, 2013
A look at a paper that explores possible assumption failures of CAPM that would explain the low volatility anomaly. Previously We've talked about CAPM before, in particular: 4 and [...]
May 28, 2013
More accurate than historical, simpler than garch. Previously We've discussed exponential smoothing in "Exponential decay models". The same portfolios were submitted to the same sort of analysis in "A [...]
May 20, 2013
Under the covers of strange bedfellows. Previously The idea of implied alpha was introduced in "Implied alpha -- almost wordless". In a comment to that post Jeff noticed that [...]
May 15, 2013
Torturing portfolios to give different volatilities between a factor model and Ledoit-Wolf shrinkage. Previously There have been posts on: "What the hell is a variance matrix?" factor models Ledoit-Wolf [...]
May 6, 2013
What's that thing about arithmetic and geometric returns and the variance? Previously An introduction to the difference between simple and log returns is: A tale of two returns Issue [...]
May 1, 2013
Most popular posts in 2013 April A practical introduction to garch modeling (posted in 2012) A tale of two returns (posted in 2010) Stock-picking opportunity and the ratio of [...]
April 29, 2013
When investment skill is simulated, it is often presented as if it is obvious how to do it. Maybe I'm wrong, but I don't think it's obvious. Previously In [...]
April 22, 2013
Using garch to learn a little about the distribution of returns. Previously There are posts on garch -- in particular: A practical introduction to garch modeling The components garch [...]
April 15, 2013
How good is the current opportunity to pick stocks relative to the past? Idea The more stocks act differently from each other relative to how volatile they are, the [...]
April 8, 2013
What to expect from fund managers who follow your investment mandate. You hope that the fund managers that you hire have skill. But markets are noisy so it is [...]
April 5, 2013
A study has come out of Cass Business School that investigates a number of ways of building equity indices. Andrew Clare, Nicholas Motson and Stephen Thomas, of course, include [...]
April 1, 2013
How has the distribution of correlations changed over the last several years? Previously Posts about correlation boxplots explained Data Daily returns of 443 large cap US stocks from 2004 [...]
March 17, 2013
How variable are garch predictions? Previously There have been several posts on garch, in particular: A practical introduction to garch modeling The components garch model in the rugarch package [...]
March 14, 2013
Highlighted LondonR is soon -- see the "Previously Announced" section. New Events Thirsty Quants 2013 March 21, London. Some thirsty quants will be going for a drink on the [...]
March 5, 2013
What effect do predicted correlations have when optimizing trades? Background A concern about optimization that is not one of "The top 7 portfolio optimization problems" is that correlations spike during [...]
February 25, 2013
Exploring the quality of predictions using random portfolios and optimization. Previously "Simple tests of predicted returns" showed a few ways to look at expected returns at the asset level. [...]
February 18, 2013
Some ways to explore how good a method of predicting returns is. Data and model The universe is 443 large cap US stocks that have data back to the [...]
February 12, 2013
Featured R for Finance Workshop 2013 March 5-6 in London. The target audience are professionals and academics, who wish to learn the basics of the statistical software R and [...]
February 11, 2013
A prediction of a portfolio's volatility is an estimate -- how variable is that estimate? Data The universe is 453 large cap US stocks. The variance matrices are estimated [...]
February 4, 2013
More risk does not necessarily mean bigger Value at Risk. Previously "The incoherence of risk coherence" suggested that the failure of Value at Risk (VaR) to be coherent is [...]
January 28, 2013
How to fit and use the components model. Previously Related posts are: A practical introduction to garch modeling Variability of garch estimates garch estimation on impossibly long series Variance [...]
January 24, 2013
The Burns Statistics blog had it's first real post today (about the corner function in the BurStMisc package). The blog will talk mainly about the R language, statistics and [...]
January 21, 2013
An exploration of the usefulness of sectors. Previously This subject was discussed in "S&P 500 sector strengths". Idea Stocks are put into groups based on the sector that the [...]
January 16, 2013
The Observer tells of a ginger tabby named Orlando who selected a random portfolio that won an investment contest. Meanwhile I have a gray tabby here on the desk [...]
January 14, 2013
What coherent risk measures are, why some people think coherence is important, and why I don't. The rules A risk measure is considered to be coherent if it satisfies [...]
January 7, 2013
Calibrations of 2013 predictions for 18 equity indices -- plus some publicly available predictions. Orientation The distributions are an attempt to see the variability if there were no market-driving [...]
December 31, 2012
Highlights of the blog over the past year. Most popular posts The posts with the most hits during the year. The top 7 portfolio optimization problems A tale of [...]
December 24, 2012
An explanation of quartiles, quintiles deciles, and boxplots. Previously "Again with variability of long-short decile tests" and its predecessor discusses using deciles but doesn't say what they are. The [...]
December 17, 2012
Historical Value at Risk (VaR) is very popular because it is easy and intuitive: use the empirical distribution of some specific number of past returns for the portfolio. Previously [...]
December 10, 2012
The Imperial College Algorithmic Trading Conference was Saturday. Talks Massoud Mussavian Massoud gave a great talk on "Algo Evolution". It started with a historical review of how trading used [...]
December 6, 2012
A simpler approach to producing the variability. Previously The post "Variability in long-short decile strategy tests" proposed a way of assessing the variability of strategy tests in which a [...]
December 3, 2012
How to capture return variability when testing strategies with long-short deciles. Traditional practice Question: Does variable X have predictive power for our universe of assets? A common scheme of [...]
December 1, 2012
Most popular posts in 2012 November The guts of a statistical factor model An easy mistake with returns A tale of two returns (posted in 2010) A practical introduction [...]
November 26, 2012
Performance analysis of an example portfolio. The portfolio We explore a particular portfolio during 2007. It invests in S&P 500 stocks and starts the year with a value of [...]
November 20, 2012
New Events Thalesians (London) 2012 November 21: Isabel Ehrlich on "Basket Options with Smile". Abstract: Due to the distinct lack of models for basket options that remain consistent with [...]
November 19, 2012
An introduction to estimating Value at Risk and Expected Shortfall, and some hints for doing it with R. Previously "The basics of Value at Risk and Expected Shortfall" provides [...]
November 12, 2012
Specifics of statistical factor models and of a particular implementation of them. Previously Posts that are background for this one include: Three things factor models do Factor models of [...]
November 5, 2012
When aggregating over both time and assets, the order of aggregation matters. Task We have the weights for a portfolio and we want to use those and a matrix [...]
November 1, 2012
Most popular posts in 2012 October Review of "R For Dummies" Annotations for "R For Dummies" A practical introduction to garch modeling S&P 500 correlation up to date A [...]
October 29, 2012
Should you use daily or monthly returns to estimate volatility? Does garch explain why volatility estimated with daily data tends to be bigger than if it is estimated with [...]
October 23, 2012
Value at Risk and Expected Shortfall are common risk measures. Here is a quick explanation. Ingredients The first two ingredients are each a number: The time horizon -- how [...]
October 22, 2012
The author is Patrick Burns. Genesis While I was in the early planning stages of a programming class (the one highlighted here), I became dissatisfied. Many elements of programming [...]
October 15, 2012
The authors are Andrie de Vries and Joris Meys. Executive summary Pretty much all I'd hoped for -- and I had high hopes. Significance The "Dummies" series is popular [...]
October 15, 2012
Here are detailed comments on the book. Elsewhere there is a review of the book. How to read R For Dummies In order to learn R you need to [...]
October 10, 2012
Which sectors are coherent, and which aren't? Previously The post "S&P 500 correlations up to date" looked at rolling mean correlations among stocks. In particular it looked at rolling [...]
October 9, 2012
Featured I'll be leading two courses in the near future: Value-at-Risk versus Expected Shortfall 2012 October 30-31, London. 30th: "Addressing the critical challenges and issues raised by the Basel [...]
October 8, 2012
I haven't heard much about correlation lately. I was curious about what it's been doing. Data The dataset is daily log returns on 464 large cap US stocks from [...]
October 1, 2012
Most popular posts in 2012 September A look at Bayesian statistics Horses and volatility A practical introduction to garch modeling Review of "Numerical Methods and Optimization in Finance" by [...]
October 1, 2012
There is a good way and a bad way to add a benchmark to a variance matrix that will be used for optimization and similar operations. Our examination sheds [...]
September 25, 2012
Featured I'll be leading two courses in the near future: Value-at-Risk versus Expected Shortfall 2012 October 30-31, London. 30th: "Addressing the critical challenges and issues raised by the Basel [...]
September 24, 2012
What is variance targeting in garch estimation? And what is its effect? Previously Related posts are: A practical introduction to garch modeling Variability of garch estimates garch estimation on [...]
September 20, 2012
The variability of garch estimates when the series has 100,000 returns. Experiment The post "Variability of garch estimates" showed estimates of 1000 series that were each 2000 observations long. [...]
September 17, 2012
Not exactly pin-point accuracy. Previously Two related posts are: A practical introduction to garch modeling garch and long tails Experiment 1000 simulated return series were generated. The garch(1,1) parameters [...]
September 14, 2012
Two items struck me as being connected. Maybe they are. The items: Payoff of betting on horses versus the odds The Missing Risk Premium by Eric Falkenstein As you [...]
September 12, 2012
Previously This book and the associated R package were introduced before. Executive Summary A very nice -- and enlightening -- discussion of a wide range of topics. Principles The [...]
September 10, 2012
The paper is "Not Fooled by Randomness: Using Random Portfolios to Analyze Investment Funds" by Roberto Stein. Here is an explanation of the idea of random portfolios. Favorite sentence [...]
September 7, 2012
Two articles in the August issue of Journal of Asset Management discuss topics that relate to random portfolios. Sharpe ratios The first article is "The Sharpe ratio's market climate [...]
September 5, 2012
Featured Thalesians, London 2012 September 12. Chia Tan on "Practical Financial Modeling". Abstract: Financial modelling is not a competition in the mastery of complexity. Rather, the aim is to [...]
September 3, 2012
An introduction to Bayesian analysis and why you might care. Fight club The subject of statistics is about how to learn. Given that it is about the unknown, it [...]
September 1, 2012
Most popular posts in 2012 August Highlights of R in Finance 2012 A comparison of some heuristic optimization methods A practical introduction to garch modeling Another comparison of heuristic [...]
August 27, 2012
How much does garch shorten long tails? Previously Pertinent blog posts include: "A practical introduction to garch modeling" "The distribution of financial returns made simple" "Predictability of kurtosis and [...]
August 20, 2012
A herd of heuristic algorithms is compared using a portfolio optimization. Previously "A comparison of some heuristic optimization methods" used two simple and tiny portfolio optimization problems to compare [...]
August 13, 2012
I unfortunately was not there, but we can vicariously enjoy it via the presentations that are posted on the conference website. Below is my take on the highlights (in [...]
August 6, 2012
Some speculation and a vision of how to make finance safer. What I know Something horrible happened Adequate testing did not occur Either there was no fire alarm for [...]
August 1, 2012
Most popular posts in 2012 July A practical introduction to garch modeling A comparison of some heuristic optimization methods Random portfolios versus Monte Carlo The top 7 portfolio optimization [...]
July 30, 2012
How are returns calculated when net asset value goes negative? Previously In "A tale of two returns" we highlighted the similarities and differences of log returns versus simple returns. [...]
July 26, 2012
Do not use order when you want rank. Background The update of "A comparison of some heuristic optimization methods" is due to the bug that Luca Scrucca spotted. Actually, [...]
July 23, 2012
A simple portfolio optimization problem is used to look at several R functions that use randomness in various ways to do optimization. Orientation Some optimization problems are really hard. [...]
July 16, 2012
Portfolio diversity is a balancing act. Previously The post "Portfolio diversity" talked about the role of the correlation between assets and the portfolio. The current post fills a hole [...]
July 9, 2012
An explanation of alpha factor alignment in portfolio optimization, and a look at the spectrum of views on it. Venue FactSet recently hosted an event that included a panel [...]
July 6, 2012
We look at volatility clustering, and some aspects of modeling it with a univariate GARCH(1,1) model. Volatility clustering Volatility clustering -- the phenomenon of there being periods of relative [...]
July 5, 2012
The email system still wasn't quite right last time. It should be better now. If so, then the email gang will see this post and will be given the [...]
July 3, 2012
The new system of sending blog posts via email should go live today. Actually it should have gone live yesterday, but I'm a dunderhead. That it didn't go live [...]
July 2, 2012
What is the difference between Monte Carlo -- as it is usually defined in finance -- and random portfolios? The meaning of "Monte Carlo" The idea of "Monte Carlo" [...]
July 2, 2012
Most popular posts in 2012 June Variability in maximum drawdown Inferno-ish R A tale of two returns (posted in 2010) Two new, important books on R The top 7 [...]
June 30, 2012
After a few weeks of feed problems with the blog, we are hoping that everything is sorted. In the next few days a choice to receive the blog via [...]
June 28, 2012
Due to problems with Feedburner, we are changing the RSS feed. If you subscribe via RSS, then you will need to resubscribe (after some brief period). Email subscriptions should [...]
June 25, 2012
June has been a good month for releases of Portfolio Probe and a bad month for disseminating the blog. Version 1.05 This is a minor release, primarily to fix [...]
June 22, 2012
Two books were recently published that are sure to help R grow even faster. R has a reputation, partially deserved, for being hard to learn. These books will help. [...]
June 21, 2012
New events To R, or not to R, that is the question The Statistical Computing Section of the Royal Statistical Society presents a one-day event on 2012 June 29. [...]
June 20, 2012
A pictorial summary of "The Volume Clock: Insights into the High Frequency Paradigm" by David Easley, Marcos M. Lopez de Prado and Maureen O'Hara. "HFT" means "high-frequency trading/trader", "LFT" [...]
June 18, 2012
A look at a simplistic measure of stock-picking opportunity. Motivation The interquartile range (the spread of the middle half of the data) has recently been added to the market [...]
June 11, 2012
How to get money to alpha, and vice versa. The problem Let's focus on two groups: People who have money and want alpha People who have alpha and want [...]
June 4, 2012
Maximum drawdown is blazingly variable. Psychology Probably the most salient feature that an investor notices is the amount lost since the peak: that is, the maximum drawdown. Just because [...]
June 1, 2012
Most popular posts in 2012 May Portfolio Diversity Random portfolios: 6 steps to a better fund management industry Cross-sectional skewness and kurtosis: stocks and portfolios A tale of two [...]
May 31, 2012
CambR was nice enough to invite Markus Gesmann and me to speak at their event on Tuesday. My talk was Inferno-ish R. See also The R Inferno. Epilogue Subscribe [...]
May 28, 2012
A look at return variability for portfolio changes. The problem Suppose we make some change to our portfolio. At a later date we can see if that change was [...]
May 22, 2012
On the way to another destination, I found some curious behavior with average correlations. The data Daily log returns from almost all of the constituents of the S&P 500 [...]
May 21, 2012
New events CambR (Cambridge UK R user group) 2012 May 29 6:30 PM for 7:00 PM start. Pat Burns "Inferno-ish R" Abstract: While R is wonderful, it is not [...]
May 17, 2012
All models are wrong, some models are more wrong than others. The streetlight model Exponential decay models are quite common. But why? One reason a model might be popular [...]
May 15, 2012
There have been some issues with the sign-up process for the Portfolio Probe newsletter and the Portfolio Probe user's list. The issues may or may not be in the [...]
May 14, 2012
Only puny secrets need protection. Big discoveries are protected by public incredulity. -- Marshall McLuhan Random portfolios have the power to improve the practice of asset management in several [...]
May 13, 2012
Real Soon Now Thalesians (London) 2012 May 16 Matthew Dixon "A Bayesian Approach to Discovering Private Companies for Private Equity Investments". Details of the event. Thalesians (New York) 2012 [...]
May 9, 2012
The minimum variance portfolios have slightly reduced correlations to assets in weight-constrained portfolios. Previously "Portfolio diversity" introduced the topic of asset-portfolio correlations. It also generated four sets of long-only [...]
May 8, 2012
Constraining the maximum asset-portfolio correlation gave bigger returns and smaller volatility. Previously "Portfolio diversity" introduced the topic of asset-portfolio correlations. It also generated four sets of long-only random portfolios [...]
May 7, 2012
How many baskets are your eggs in? Meucci diversity Attilio Meucci directly addresses the adage: Don't put all your eggs in one basket. His idea is to think of [...]
May 5, 2012
You can win money by saying how to get people to treat themselves better. InnoCentive has a challenge: How do we best get people to understand how important it [...]
May 1, 2012
Most popular posts in 2012 April Information flows like water Replacing market indices The top 7 portfolio optimization problems A tale of two returns (posted in 2010) Cross-sectional skewness [...]
April 30, 2012
Not quite expected behavior of skewness and kurtosis. The question In each time period the returns of a universe of stocks will have some distribution -- distributions as displayed [...]
April 23, 2012
they ought at least be allowed to state why they didn't do anything and also to explain the process by which they didn't do anything. First blush One of [...]
April 21, 2012
The focus on tracking error rules out a low volatility strategy. Simply put, most money managers are focused on outperforming their benchmarks without adding risk. And because risk is [...]
April 16, 2012
Guiding a ship, it takes more than your skill Spark David Rowe's Risk column this month is about data leverage. The idea is that you are leveraging your data [...]
April 9, 2012
Factor models are heavily used in finance to create variance matrices. Here's why. Factor models: Provide non-degenerate estimates Save space Quantify sources of risk Non-degenerate estimates First off, what [...]
April 4, 2012
How did the constraints affect portfolio betas, and how did the betas change over time? Previously “Low (and high) volatility strategy effects” created 6 sets of random portfolios -- [...]
April 2, 2012
If equity markets suddenly sprang into existence now, would we create market indices? I'm doubtful. Why an index? The Dow Jones Industrial Average was born in 1896. This was [...]
April 1, 2012
Most popular posts in 2012 March Beta is not volatility The shadows and light of models A tale of two returns (posted in 2010) The top 7 portfolio optimization [...]
March 29, 2012
Maximum weight was constrained to 4% at the start of 2007, how does that grow when unhindered? Previously “Low (and high) volatility strategy effects” created 6 sets of random [...]
March 28, 2012
How much turnover is required to get portfolios back to their constraints? Previously “Low (and high) volatility strategy effects” created 6 sets of random portfolios as of 2007 and [...]
March 26, 2012
The missing link between beta and volatility is correlation. Previously "4 and a half myths about beta in finance" attempted to dislodge several myths about beta, including that beta [...]
March 23, 2012
Does minimum variance act differently from low volatility? Do either of them act like low beta? What about high volatility versus high beta? Inspiration Falkenblog had a post investigating [...]
March 19, 2012
The subtitle is "Central banks, credit bubbles and the efficient market fallacy". Executive summary This is much too important of a book to remain as obscure as it is. [...]
March 16, 2012
The pro and con of fundamental indexing. Last Tuesday the London Quant Group sponsored a boxing match between forces for and against fundamental indexing. Adam Olive was in the [...]
March 12, 2012
A bit of testing of the estimation of the variance matrix for S&P 500 stocks in 2011. Previously There was a plot in "Realized efficient frontiers" showing the realized [...]
March 5, 2012
How wide is the darkness? Uses of models The main way models are used is to: shine light on the "truth" We create and use a model to learn [...]
March 1, 2012
Most popular posts in 2012 February What does 'passive investing' really mean The BurStFin R package The distribution of financial returns made simple The top 7 portfolio optimization problems [...]
February 29, 2012
2011 was a good vintage for minimum variance, at least among stocks in the S&P 500. Previously The post "Realized efficient frontiers" included, of course, a minimum variance portfolio. [...]
February 27, 2012
A look at the distortion from predicted to realized. The idea The efficient frontier is a mainstay of academic quant. I've made fun of it before. This post explores [...]
February 20, 2012
We know the words but what do they mean? Some definitions Here are some definitions of "passive investment management". Investopedia says: A style of management associated with mutual and [...]
February 17, 2012
The Portfolio Probe blog is caught by two blog aggregators. Finance MoneyScience has an aggregation of financial blogs. It now catches over 50 blogs. R R Bloggers captures the [...]
February 16, 2012
Version 1.01 of BurStFin is now on CRAN. It is written entirely in R, and meant to be compatible with S+. Functionality The package is aimed at quantitative finance, [...]
February 13, 2012
How fat tailed are returns, and how does it change over time? Previously The sister post of this one is "A slice of S&P 500 skewness history". Orientation The [...]
February 6, 2012
The Super Bowl tells us so. The Super Bowl Indicator The championship of American football decides the direction of the US stock market for the year. If a "National" [...]
February 1, 2012
Most popular posts in 2012 As of 2012 January 31. The top 7 portfolio optimization problems A slice of S&P 500 skewness history Review of "Models. Behaving. Badly." by [...]
January 30, 2012
Why confusing illusion with reality can lead to disaster, on Wall Street and in life. Note that the cover is more clever than you might at first notice. Ceci [...]
January 26, 2012
Conspicuous consumption -- buying what others can't afford -- is a disequilibriating force. Prices get raised and supply is limited. The goods that are conspicuously consumed are positional goods. [...]
January 24, 2012
London Quant Group Monday 2012 January 30 starting at 6.30pm, to be held at the offices of BlackRock, 12 Throgmorton Avenue, London. Jason MacQueen speaking on "The Structure of [...]
January 23, 2012
Why returns have a stable distribution As "A tale of two returns" points out, the log return of a long period of time is the sum of the log [...]
January 19, 2012
A not unusual part of a response on the R-sig-finance mailing list is: "Search the list archives." In principle that makes sense. In practice it might not be clear [...]
January 16, 2012
How symmetric are the returns of the S&P 500? How does the skewness change over time? Previously We looked at the predictability of kurtosis and skewness in S&P constituents. [...]
January 12, 2012
Hardcopy versions of both The R Inferno and S Poetry are now available for sale. Physical economy Buy The R Inferno (the version dated 2011 April 30) Buy [...]
January 11, 2012
Falkenblog has a post on ecological studies of animal intelligence. The entire post is interesting, but I particularly like his last sentence: [I]f you think that because you have [...]
January 9, 2012
Equal risk contribution of assets determines the asset weights given the variance matrix. How sensitive are those weights to the variance estimate? Previously The post "Risk parity" gave an [...]
January 5, 2012
Stumbling blocks on the trek from theory to practical optimization in fund management. Problem 1: portfolio optimization is too hard If you are using a spreadsheet, then this is [...]
January 2, 2012
A review of market predictions and results for 2011, and a calibration for 2012 predictions (of 19 equity indices plus oil). Previously One year ago the post "Revised market [...]
December 28, 2011
Most popular posts Two of the ten most popular posts during the year were completely about R: The R Inferno revised (number 6) Solve your R problems (number 9) [...]
December 28, 2011
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 [...]
December 22, 2011
The Computational and Financial Econometrics conference was just held in London. Here are three talks from the large menu. Lars Helge Hass The objective is to find a way [...]
December 21, 2011
A possible way to search for constraints that improve optimization. The perspective The usual way of thinking about portfolio optimization is to first consider the utility and then restrict [...]
December 16, 2011
Two recent posts included the word "news", but in different senses. Events "News" in the sense of reports on events was discussed in "News analytics". We can think of [...]
December 15, 2011
Do non-trading days explain the mystery of volatility estimation? Previously The post "The volatility mystery continues" showed that volatility estimated with daily data tends to be larger (in recent [...]
December 13, 2011
Two people, two sources. Planes Deus ex Macchiato has a post called "Planes not bridges" in which it is suggested that learning from air traffic investigators makes sense. The [...]
December 12, 2011
Last week was the news analytics workshop at Birkbeck College. The idea There is room in news analytics for a large range of approaches. The leading model runs along [...]
December 10, 2011
The biggest and perhaps best meeting yet. The talks James Long: "Easy Parallel Stochastic Simulations using Amazon's EC2 & Segue". This was a lively talk about James' package to [...]
December 5, 2011
How do volatility estimates based on monthly versus daily returns differ? Previously The post "The mystery of volatility estimates from daily versus monthly returns" and its offspring "Another look [...]
November 30, 2011
How does the effect of our expected returns change over time? This is not academic curiosity, we want to know in the context of our portfolio if we can. [...]
November 28, 2011
The idea Borrow in a currency with low interest rates, lend in a currency with high interest rates. The image Photo by Patti via stock.xchng The question Am I [...]
November 27, 2011
New events QWAFAFEW-NYC 2011 November 29 5:30PM Midtown: Barry Feldman on "Stability - A New Dimension of Equity Style" and Dan diBartolomeo on "Five Easy Steps to Fixing the [...]
November 23, 2011
Room with a view. A problem Most groups concerning finance on LinkedIn are full of garbage. Lots of items that don't pertain to the real subject of the group, [...]
November 21, 2011
Be careful if you have global daily data. The issue Markets around the world are open at different times. November 21 for the Tokyo stock market is different from [...]
November 16, 2011
The return of a hypothetical fund was 17.9% in 2010. We want to know if that is good or bad. The benchmark method The assets in the portfolio are [...]
November 14, 2011
Several practical steps. Executive summary A great goal, but can it deliver? I was skeptical. However, I've been won over -- the book proposes several specific actions that are [...]
November 11, 2011
Casting doubt on the possibility of mean reversion in the S&P 500 lately. Previously A look at volatility estimates in "The mystery of volatility estimates from daily versus monthly [...]
November 8, 2011
What drives the estimates apart? Previously A post by Investment Performance Guy prompted "Variability of volatility estimates from daily data". In my comments to the original post I suggested [...]
November 7, 2011
Financial mathematicians have built an increasingly elaborate structure around the idea of “the market” ... In this article, I intend to challenge some of these foundational concepts with the [...]
November 3, 2011
Investment Performance Guy has a post "Periodicity of risk statistcs (and other measures)" in which it is wondered how valid volatility estimates are from a month of daily returns. [...]
November 2, 2011
A semantic confusion leads us to use the word market to describe both the process which puts food on our table and the activity of gambling in credit default [...]
November 1, 2011
Some upcoming events. News Analytics Applied to Trading, Fund Management and Risk Control News interacts with markets. This workshop will explore news feeds and models that are used to [...]
October 31, 2011
Some thoughts and resources regarding a popular fund management buzzword. The idea Given asset categories (like stocks, bonds and commodities) create a portfolio where each category contributes equally to [...]
October 28, 2011
Last night at the Royal Institution's 14-10 club George Cooper gave a talk based on his book The Origin of Financial Crises. One of the analogies was between James [...]
October 27, 2011
The book is by Manfred Gilli, Dietmar Maringer and Enrico Schumann. I haven't actually seen the book, so my judgement of it is mainly by the cover (and knowing [...]
October 24, 2011
For those who naturally compute portfolio returns correctly here are some lessons in how to do it wrong. The data Random portfolios were generated from constituents of the S&P [...]
October 20, 2011
Are there times of the year when returns are better or worse? Abnormal Returns prompted this question with "SAD and the Halloween indicator" in which it is claimed that [...]
October 17, 2011
Executive Summary Simple but not simplistic explanations of several big ideas in economics. Surprises Thing 4 The washing machine has changed the world more than the internet has. We [...]
October 13, 2011
A different sort of generalization of variance partitions. Previously The post "Generalizing risk fractions" described additional (to version 1.04 of Portfolio Probe) ways of dividing the variance among the [...]
October 11, 2011
Thomas Sargent and Chris Sims won the 2011 Nobel Prize in economics. In a nutshell Sargent won for dynamic learning of economic agents and Sims won for championing vector [...]
October 10, 2011
More ways of constraining the variance attributable to individual assets. Introduction This post describes some additions to the 1.04 version of Portfolio Probe. A beta of that version was [...]
October 3, 2011
How much predictability is there for these higher moments? Data The data consist of daily returns from the start of 2007 through mid 2011 for almost all of the [...]
October 1, 2011
This week 14-10 2011 October 06 (7:30PM start) at the Royal Institution the inaugural event of the 14-10 club will take place. Speakers will be David Harding, Alex Lipton [...]
September 30, 2011
Con Keating gave a talk Wednesday in which he called for pensions to be unfunded, but insured. Key points Pooling is efficient We are definitely rich enough to afford [...]
September 29, 2011
Abnormal Returns points to The Capital Spectator piece Volatility & Portfolio Management research review. This has links to 5 relatively recent papers related to volatility. Previous posts here on [...]
September 27, 2011
fMRI data from 90 locations in the brain look somewhat like daily closing prices on 116 stocks if you squint just right. Marginal Revolution was nice enough to point [...]
September 26, 2011
The document is "Don't stop believing: The state and future of UK occupational pensions" by Con Keating. Overview It seems to me that pensions are hard. Me, I just [...]
September 22, 2011
Our hunger for certainty. Executive Summary This book is very good, why isn't it more famous? Because it is saying precisely what we don't want to hear. Competing books [...]
September 19, 2011
Investors need to distinguish between good and bad active fund managers. Relatively new technology makes this much easier. The usual methods benchmark One of the common approaches is to [...]
September 16, 2011
Some pictures to explore the reality of the theory that stocks with higher beta should have higher expected returns. Figure 2 of "The effect of beta equal 1" shows [...]
September 12, 2011
download 'The R Inferno' Update While it is still not for sale at a website near you, it is also for sale at a website near you: Buy [...]
September 9, 2011
Mark Buchanan in The Physics of Finance has another great post called "Of hurricanes and economic equilibrium". The Efficient Market Hypothesis has been beaten up quite a lot lately, [...]
September 8, 2011
Data The data are daily returns starting at the beginning of 2007. There are 477 stocks for which there is full and seemingly reliable data. Estimation The betas are [...]
September 6, 2011
Human logic is more like quantum logic than formal logic. The Physics of Finance in "Quantum thinking" points to an article in New Scientist (actually the cover piece) about [...]
September 5, 2011
The subtitle is: Adversaries in Art, Science and Philosophy. Executive Summary Genius or madness? I haven't decided. Irreversibility of interpretation The book drives home that once we decide how [...]
September 4, 2011
Deus Ex Macchiato has a brief post called "Prices as modified Schelling Points". It is a cute little idea about how markets work. I had known of the concept [...]
August 31, 2011
Dan Ariely has a post called "Asking the right and wrong questions" about financial advisors. It starts off with: For the most part, professional financial services rely on clients’ [...]
August 30, 2011
What does beta look like in the out-of-sample period for the portfolios generated to have beta equal to 1? In the comments Ian Priest wonders if the results in [...]
August 30, 2011
Mark Buchanan has a piece on Bloomberg called "Sand in the machine the key to stable markets". This is an introduction into the idea that market efficiency is at [...]
August 29, 2011
Investment Performance Guy had a post about beta equal 1. It made me wonder about the properties of portfolios with beta equal 1. When I looked, I got a [...]
August 25, 2011
The title says "things" but conferences are mainly about people. Some of it can be serendipitous. For example, one day I sat next to Jonathan Rougier at lunch because [...]
August 24, 2011
The Barron's article "Hitting the Switch on New Circuit Breakers" describes a backtest of the proposed new rules for circuit breakers in American markets. All trades for 2008 through [...]
August 23, 2011
The usual approach to testing software is to create a specific problem and see if the software gets the correct answer. Although this is very useful, there are problems [...]
August 22, 2011
Start Brian Ripley The conference was opened with a talk by Brian Ripley. I'll distort his talk into 3 points that came across to me. 1. R Core is [...]
August 21, 2011
100 years ago today a small, rather obscure masterpiece was stolen from the Louvre by a disillusioned former(?) employee. Subsequently: the painting was recovered during an attempt to sell [...]
August 20, 2011
Yes, the title is meant to have two readings. The effect The Numbers Guy, among other examples, talks about the UK Office for National Statistics needing to revise its [...]
August 20, 2011
From Saturday Morning Breakfast Cereal: Hat tip to This is the Green Room Subscribe to the Portfolio Probe blog by Email
August 15, 2011
A response to Danielsson and Macrae. Previously In "The appropriate use of risk models" I presented a synopsis of the Danielsson and Macrae document by the same name, and [...]
August 12, 2011
New Scientist has an editorial that points to "Complexity, Concentration and Contagion" out of the Bank of England. The paper describes some experiments with a network calibrated to look [...]
August 9, 2011
The first 6 trading days of August have been bad for the major indices, but how variable is that across portfolios? To answer that, two sets of random portfolios [...]
August 8, 2011
To fix a broken market. The exercise Some teachers of quality control present their students with a series of pictures like Figure 1. Figure 1: Center the process on [...]
August 4, 2011
Exclusively for finance professionals who have a background in science and mathematics and want to keep their interests alive, the 14-10 club meets on a monthly basis to hear [...]
August 2, 2011
Empirical Finance Blog has a post called "How to use the Fama French Model". I find the first part of the post most interesting. This shows some examples of [...]
August 1, 2011
What do we lose when we use a benchmark? Simple Make everything as simple as possible, but not simpler. -- Albert Einstein Everything should be made as simple as [...]
July 28, 2011
Here are some additions to the previous post on S&P 500 correlation. Correlation distribution Before we only looked at mean correlations. However, it is possible to see more of [...]
July 25, 2011
*Once you know the answer. Executive summary If you think common sense is a good thing, read this book. Triumvirate for a complex world The three books are: Obliquity [...]
July 21, 2011
Jon Danielsson and Robert Macrae on how to think about risk models. Uncertainties in risk models The authors point to several reasons why risk models are uncertain: The model [...]
July 18, 2011
Friday July 22 is the last day on which you can register for UseR! 2011 at the University of Warwick. The conference will be 2011 August 16-18. You can [...]
July 18, 2011
Ticker Sense posted about the mean correlation of the S&P 500. The plot there -- similar to Figure 1 -- shows that correlation has been on the rise after [...]
July 15, 2011
The subtitle is "An Investor's Guide to Harvesting Market Rewards". Executive summary I don't hold myself as being much at forecasting, but I predict that this will be a [...]
July 13, 2011
In which random portfolios are used as the vehicle for portfolio optimization. The paper The author is William Shaw. The paper goes by the succinct title of "Portfolio Optimization [...]
July 11, 2011
If a particular prediction comes true, how surprised should we be? The prediction The page that sparked my curiosity tells of a prediction made a year ago that the [...]
July 7, 2011
The MoneyScience website has recently had a dramatic change. It now has a social infrastructure, and the resources are better organized. Here I report on the discoveries I've made [...]
July 5, 2011
The blog Email It is now possible to subscribe to the Portfolio Probe blog via email. Just click on: Subscribe to the Portfolio Probe blog by Email (The captcha [...]
July 4, 2011
Low volatility investing and performance measurement -- my favorite topic scheme -- how could I resist? The paper The paper is "Benchmarking Low-Volatility Strategies" by David Blitz and Pim [...]
June 30, 2011
Winsorization replaces extreme data values with less extreme values. But why Extreme values sometimes have a big effect on statistical operations. That effect is not necessarily a good effect. [...]
June 27, 2011
The subtitle is "Why success always starts with failure". Executive summary Brilliant. Funny. Enlightening. Complexity We live in a complex world. Exhibit number 1 (page 1) is the Toaster [...]
June 24, 2011
Volume 3/1 of The R Journal has been released. It of course has articles about using R. In addition it has a feature that I highly support. In preparation [...]
June 22, 2011
A summary of the high points of the day. Factor models and optimization Three of the talks formed a theme: factor models of variance -- especially as applied to [...]
June 19, 2011
If returns had infinite variance, would there be a problem bootstrapping information ratios? Background There is a discussion on the Quant Finance group of LinkedIn with the title: "How [...]
June 17, 2011
Here is a schematic of a financial bubble. This is taken from a post by The Reformed Broker. Questions The picture feels right to me, but ... Is there [...]
June 16, 2011
Graphs like Figure 1 are reasonably common. But they are not reasonable. Figure 1: A (log) price series with an explicit guide line. Some have the prices on a [...]
June 13, 2011
To look in the corners we want to avoid. David Rowe's latest Risk column, "Stress testing culture", concerns the difficulty of developing good stress scenarios. One of his particular [...]
June 7, 2011
You probably thought the title was ironic. Why should that be? Mutual benefit Falkenblog has a post that includes: When the barista says 'thank you' for buying coffee, and [...]
June 6, 2011
How can we spot bubbles before they burst? Executive Summary I had high hopes for this book. The first 5 chapters lived up to my expectations. The remaining chapters, [...]
June 2, 2011
The R/Finance conference happened in Chicago at the end of April. If, like me, you weren't there, you can still benefit from it because slides from many of the [...]
May 31, 2011
Attilio Meucci has written "The Prayer" which gives a ten-step process of quantitative analysis of the profit and loss stream. The paper is nicely laid out. Each step includes [...]
May 26, 2011
Zanran is a new search engine that helps you find data. It indexes items that have tables or figures that seem to display data. It looks to be significantly [...]
May 23, 2011
What can we learn about the difference in structure between a Ledoit-Wolf variance matrix and a corresponding factor model variance? Previously We've generated a set of random portfolios with [...]
May 19, 2011
The London Quant Group Spring Seminar took place this Monday and Tuesday 2011 May 16-17. There were 9 talks -- I give a brief (and biased) summary of each. [...]
May 15, 2011
One suggestion is that benchmarks should be: transparent & unambiguous frame-able & customize-able appropriate with full coverage investable The source of this suggestion is Setting the Benchmark: Spotlight on [...]
May 9, 2011
How does modern risk management relate to Mayan hieroglyphics? If you want to guess, here are some hints: fire language Connecticut The Mayan civilization prospered in Central America at [...]
May 4, 2011
We come closer to a definitive answer on the relative merit of Ledoit-Wolf shrinkage versus a statistical factor model for variance matrices. Previously This post builds on the post [...]
May 2, 2011
Hell is new and improved. The R Inferno has been revised. If you don't know of it, it is a short explanation of a few trouble spots when using [...]
April 28, 2011
Statistical factor models and Ledoit-Wolf shrinkage are competing methods for estimating variance matrices of returns. So which is better? This adds a data point for answering that question. Previously [...]
April 25, 2011
Smart Swarm is a book about decision-making. Fund management is all about decision-making. Hence this book is about fund management. Indeed financial examples crop up several times. Executive summary [...]
April 21, 2011
What is the effect on predicted and realized volatility of substituting risk fraction constraints for weight constraints? Previously This post depends on two previous blog posts: "Unproxying weight constraints" [...]
April 18, 2011
How well do asset weight constraints constrain risk? The setup In "Unproxying weight constraints" I claimed that many constraints on asset weights are really a proxy for constraining risk. [...]
April 16, 2011
I'd never heard of the golden cross before a few minutes ago. But The Reformed Broker talked about it. He lists some data that just ached to be thrown [...]
April 14, 2011
Four hundred years ago today Galileo Galilei brought forth a new instrument. On 1611 April 14 Galileo did a demo of his telescope in Rome. That bit of glass [...]
April 13, 2011
It is common practice to have portfolio constraints like: wi ≤ 0.05 That is, the weight of each asset can be no more than 5%. Proxy for risk We [...]
April 4, 2011
Friday was a day to fool others. Every day is a day to fool ourselves. Primed to know The video gives a great example of how knowing what to [...]
March 28, 2011
Overfitting is a problem when trying to predict financial returns. Perhaps you've heard that before. Some simple examples should clarify what overfitting is -- and may surprise you. Polynomials [...]
March 21, 2011
Markets can be disrupted in numerous ways. We should prepare as best we can. Gloom Here are some things that will happen some day: An epidemic threatens millions or [...]
March 14, 2011
In the Aymara language the past is in front and the future is behind. It is rare for languages (at least existing ones) to have the metaphor turned this [...]
March 7, 2011
In "What the hell is a variance matrix?" I talked about the basics of variance matrices and highlighted challenges for estimating them in finance. Here we look more deeply [...]
March 2, 2011
2011 March 08, 8:00 AM, London EDHEC Risk Institute presents: Raman Uppal How to (or how not to) manage money New approaches for portfolio construction. Admission is free, but [...]
February 28, 2011
Can fund managers capture money that is now gambled away? Investing versus gambling A clean, though imperfect, distinction between investing and gambling is: if the expected return is positive, [...]
February 25, 2011
There is a deep connection between political mechanisms and economic mechanisms, at least according to Ajay Shah. Price flexibility Ajay Shah has a post called Jittery regimes fix prices. [...]
February 20, 2011
The Thalesians is a group that has been going for a few years in London, and is just about to have its first event in New York. It holds [...]
February 17, 2011
High volatility stocks are, in general, nonsensical. Who's to blame? The high vol gamble Theory says that investors demand higher returns for higher volatility assets. Reality says that the [...]
February 14, 2011
Some concrete steps for discerning skill from luck. The Harvard Business Review published a guest blog post by Michael Mauboussin called Untangling Skill and Luck. That post is really [...]
February 10, 2011
The site is http://quant.stackexchange.com/ A new area has emerged in Stack Exchange for Quantitative Finance (in trying to spell that I now know why it is usually just "quant"). [...]
February 8, 2011
Much of what has been said and thought about beta in finance is untrue. Myth 1: beta is about volatility This myth is pervasive. Beta is associated with the [...]
February 7, 2011
How to visualize luck when looking for skill. Quantitative Finance just published the paper Dicing with the market: randomized procedures for evaluation of mutual funds by Francesco Lisi. Here [...]
February 4, 2011
The Super Bowl will take place on Sunday. This is the final game for American Football (if you have to ask, then: "No, not real football"). Not only is [...]
February 1, 2011
February 2nd is Groundhog Day. If Punxsutawney Phil sees his shadow, then he goes back into his burrow and hibernates for six more weeks. Otherwise he predicts an early [...]
January 31, 2011
Thinking of the market as having a personality can be fun and educational. But it has a dark side as well. Benjamin Graham The idea of Mr Market was [...]
January 28, 2011
Instability in the economy seems to be the zeitgeist of the week. Counter-intuitives Science Daily has a story on a mathematical model of extinction. Apparently a key finding is [...]
January 26, 2011
Fundamental Hawk (perusii balancesheetus) Very discriminating in diet. Often seen scratching in the undergrowth. Subsists on irrationality, short-lived variety only. Macro Harrier (exsanguinus economicus) Flies very high. Reports of [...]
January 24, 2011
Executive summary: Extremely useful for new users, informative to even quite seasoned users. Refereeing Once upon a time a publisher asked if I would referee a book (unspecified) about [...]
January 24, 2011
Suppose I borrow a dollar from you and I'll pay you 100% interest at the end of the year. How much money will you have then? $1 * (1 [...]
January 20, 2011
Gambling Falkenblog has a post called: Why Do People Gamble? This includes the often-stated "problem" that the same people both: pay for insurance pay to gamble Maybe I'm being [...]
January 17, 2011
We think of accidents as abnormal events, but there is "normal accident" theory. We don't think of accidents happening in markets, but they do. That's why it's called a [...]
January 14, 2011
Markets Sex and statistics Marginal Revolution had the post Sex and Statistics or Heteroscedasticity is Hot which reports on the OkTrends post The Mathematics of Beauty. The summary is [...]
January 12, 2011
It is ever so easy to make blunders when doing quantitative finance. Very popular with novices is to analyze prices rather than returns. Regression on the prices When you [...]
January 10, 2011
Amy Anyone: What is EMH? Boris The Banker: That's the Efficient Market Hypothesis, or sometimes the Efficient Markets Hypothesis. Amy: What's that? Boris: It says that all available and [...]
January 6, 2011
We look at a few forecasts for the year 2011 that we've run across, and compare them with the prediction distributions presented in Revised market prediction distributions. FTSE 100 [...]
January 4, 2011
This provides revised plots of the prediction distributions published yesterday. The previous plots of prediction distributions should be ignored -- they are not doing as advertised. We show the [...]
January 4, 2011
Here we give details and code for the prediction distributions exhibited in yesterday's blog post "Tis the season to predict". [Revision: There was a problem with the plots published [...]
January 3, 2011
I predict there will be a lot of predictions of markets for the coming year. Here is a calibration of such predictions. We show the prediction distribution of levels [...]
December 30, 2010
The blog year started in August and consists of 30-something posts. Here is a summary. Most popular Ideas for World Statistics Day A quant review of "The Quants" by [...]
December 27, 2010
We're really interested in markets, but we'll start with a series of coin tosses. If the coin lands heads, then we go up one; if it lands tails, we [...]
December 23, 2010
One of the things I'd most like to happen in finance is for a science mindset to take hold. Perhaps this would happen more if society as a whole [...]
December 20, 2010
David Rowe has a short piece called Regulators Double Down. He argues that risk regulations should be simple at the expense of consistency, rather than complex at the expense [...]
December 16, 2010
The idea of a greedy algorithm (for optimization) is that you do as best you can locally and you don't worry about the big picture. For some problems a [...]
December 13, 2010
A friend recently bought The R Book and I said I would tell him of problems that I've noticed with it. You can eavesdrop. Page 4 The word "library" [...]
December 10, 2010
What would happen if I jumped the turnstile at my local tube station? Well okay, duck under in my case. Best case: people glare at me like I'm scum. [...]
December 6, 2010
When were there bear and bull markets in US stocks since 1950? Smoothing While we'd really like to estimate the expected return at each point in time, finding bear [...]
November 30, 2010
All About Alpha has a post called Insider traders: rogues or whistleblowers? It is a pleasantly disturbing look at insider trading in that it challenges the reflex reaction that [...]
November 29, 2010
The Joy of Stats really is a joy. It will be shown on BBC4, apparently scheduled for December 7. (That date comes from Hans Rosling on twitter, I haven't [...]
November 26, 2010
Many from the R world will know The R Inferno. Abstract: If you are using R and you think you're in hell, this is a map for you. A [...]
November 22, 2010
We know that the S&P 500 was up a little in 2007 and down a lot in 2008. So on the surface the question seems really stupid. But randomness [...]
November 18, 2010
How could a book about indirectly solving problems and one about human motivation be saying the same thing? Obliquity Chapter 1 (and more) is about happiness. We've been here [...]
November 15, 2010
There are two types of technology: Good (does exactly as wanted, with no hassle) Primitive (all the rest) This classification has been instilled into me by my wife. The [...]
November 11, 2010
As if that is news to some of you. Forbes has a Mean Business blog post by Steve McNally titled "Names You Need to Know in 2011: R Data [...]
November 9, 2010
The game ARORA (A random or real array) is a website that gives you two time series at a time. Your job is to guess which series is real [...]
November 5, 2010
On Tuesday I gave a talk at the Thalesians entitled "Effective backtesting". You can get the annotated slides but below is an almost wordless introduction to backtesting. Introduction Figure [...]
October 28, 2010
We'll get to "antisocial" via a look at a chapter in The Future of Finance from the London School of Economics. The chapter in question is "Why are financial [...]
October 26, 2010
This arrives via Marginal Revolution. But note that there is a check mark missing: Psychic fund management.
October 25, 2010
I will speak November 2 at the Thalesians on "Effective Backtesting". Registration is now open. Abstract: Backtesting builds a bridge from the past to the future. These bridges are [...]
October 21, 2010
Jonathan Ruffer provides a brilliant metaphor regarding the possibilities for deflation and inflation. It is in the recent post by Jonathan Davis: Q and A with Jonathan Ruffer. I [...]
October 19, 2010
World Statistics Day is 2010 October 20. If you work with data or you should, then you are a statistician and this is a day for you. Try the [...]
October 18, 2010
Fringe provides an excellent example of cointegration. This is a television show in which there are two adjacent universes. The universes are almost alike but not exactly. Now, everyone [...]
October 12, 2010
Isn't the horse facing the cart? "A New Look At Minimum Variance Investing" by Bernd Scherer (SSRN version) looks at a few aspects of minimum variance portfolios. We've been [...]
October 5, 2010
Finally, an operator's manual for the human brain. You should read this book, but in the meantime I'll summarize the rules over which you have some control: exercise don't [...]
October 4, 2010
It was the best of times, it was the worst of times. As you may have guessed, this is a mashup of a novel by Charles Dickens and an [...]
September 29, 2010
• LondonR Group will meet 2010 October 05 6PM - 9PM The Counting House, 50 Cornhill near Bank, London. See details at http://www.londonr.org/ • The HEC Finance and Statistics [...]
September 23, 2010
Your happiness probably lies outside this book. Fund management If you think this topic remote from fund management, I think you're wrong. Suppose that we deliver a lot of [...]
September 20, 2010
Before we get to the meat of the subject, I just have to comment on the "modern" of Modern Portfolio Theory. Figure 1: Modern telephone switch Figure 1 shows [...]
September 17, 2010
There's a hole in the bucket of traditional economics. Homo socialus seems to be on the rise, and homo economicus is getting harder to find. Vulcanism has become evident [...]
September 13, 2010
Finance textbooks say that more volatile assets should have higher returns. The volatility puzzle is that that doesn't always hold true. You should be getting used to textbooks not [...]
September 8, 2010
I had considered doing a satire on using astrology to do fund management. Something along the lines of Capgemini is a Pisces, perhaps. Reality seems to have beat me [...]
September 7, 2010
The current New Scientist includes an article about perception switching. They use the figure below. "Why your brain flips over visual illusions" is about the brain and perceptual switching [...]
September 6, 2010
We have a portfolio with weights A=20%, B=60%, C=20%. That we have this particular portfolio is really a market prediction. What are the returns that the portfolio is "expecting"? [...]
August 30, 2010
There were giant mutant quants destroying every ... Oh, sorry. That was ants not quants, and it was a Japanese movie not a book. Given my blog's remit, it [...]
August 25, 2010
When I first came to finance, I kept hearing about "risk models". I wondered, "What the hell is a risk model?" Of course, I didn't say this out loud [...]
August 24, 2010
Monday's Last Word by James Mackintosh in the FTfm states that stock correlations are very high relative to the historical record. He asserts that at least part of this [...]
August 19, 2010
The paper "Economists' Hubris -- The case of equity asset management" (SSRN) by Shojai, Feiger and Kumar has achieved some measure of notoriety. It has mentions in the MoneyScience [...]
August 10, 2010
Once I decided to blog, I had to determine how to go about it. My first thought was of Dorothy Parker. No one ever wanted to leave the table [...]