Blog year 2012 in review

Highlights of the blog over the past year.

Most popular posts

The posts with the most hits during the year.

  1. The top 7 portfolio optimization problems
  2. A tale of two returns (posted in 2010)
  3. A practical introduction to garch modeling
  4. A look at Bayesian statistics
  5. A comparison of some heuristic optimization methods
  6. The distribution of financial returns made simple
  7. The number 1 novice quant mistake (posted in 2011)
  8. Market predictions for years 2011 and 2012
  9. What the hell is a variance matrix? (posted in 2010)
  10. The BurStFin R package
  11. Beta is not volatility
  12. Review of “Models. Behaving. Badly.” by Emanuel Derman
  13. The mystery of volatility estimates from daily versus monthly returns (posted in 2011)
  14. A slice of S&P 500 skewness history
  15. What does ‘passive investing’ really mean
  16. The quality of variance matrix estimation
  17. Highlights of R in Finance 2012

Most under-valued posts


There is probably no other thing I saw in 2012 with more power to improve the world than The Origin of Financial Crises by George Cooper. This explains why central banks are a necessary evil, and how they are currently more focused on the evil than the necessary.

My second nomination for under-valued is the post that explains several ways that random portfolios can change fund management for the better.

Finally there’s the post that proposes a simple thing that would improve the prospects of prospective fund managers.

Book reviews

Table 1 summarizes (and has links to) the reviews of books during the year.

Table 1: Recommendations of reviewed books.

title author recommended
Tao Te Programming Patrick Burns have a guess
The Origin of Financial Crises George Cooper highly
Models. Behaving. Badly. Emanuel Derman yes
R For Dummies Andrie de Vries, Joris Meys highly
Numerical Methods and Optimization in Finance Manfred Gilli, Dietmar Maringer, Enrico Schumann yes
Programming Graphical User Interfaces in R Michael Lawrence, John Verzani for some

9781119962847 cover.indd

There was not only a review of R For Dummies but also a set of annotations for it.

Fund management

There was something possibly informative on portfolio diversity as well as some other attempts.

Thinking beyond indices was urged, which prompted the market portraits.  Random portfolios can encourage the expanded viewpoint as well as improve fund management in other ways.  There was also a report on a debate about fundamental indices.

Low volatility appeared a number of times.

Other posts included:

Funny pages

The video in the review of Models. Behaving. Badly.:

Everything I’ve ever told you has been a lie, including that.

— the devil in “Bedazzled”

From “The battle of Fundamental Index”:

Gentlemen, you can’t fight in here. This is the war room.

Inferno-ish R also references Dr. Strangelove.

“Smoothing the market for alpha” has:

“This stuff is better than cotton candy, really it is. It’s made out of real cotton. Yossarian, you’ve got to help me make the men eat it. Egyptian cotton is the finest cotton in the world.”

from Catch-22 by Joseph Heller


A pair of posts compared a number of heuristic optimizers in R.  One used a tiny, unrealistic portfolio optimization problem.  The other used a larger but still unrealistic portfolio optimization.


“Discovering the quality of portfolio decisions” shows how randomness can be used not only for performance measurement, but for attribution as well.

“Not fooled by randomness” points to a paper that studies the use of random portfolios for performance measurement.

There was also a post that discussed two papers from the Journal of Asset Management.

Quant finance

There was a suggestion of how to improve the ubiquitous long-short decile tests.

A number of posts talked about garch, most prominently “A practical introduction to garch modeling”. There’s a piece relating garch to cross sectional variability.

Volatility clustering impacts the distribution of returns.  The satire in “The distribution of financial returns made simple” seems to have alluded some readers.  What happens to returns when the net asset value goes negative? Try to avoid an easy mistake with returns.

Factor models were explained in general and more specifically.  You can see how to add a benchmark to a variance.  There was a glimpse at the quality of variance matrix estimationAlpha alignment is a related concept.

Top problems with portfolio optimization were highlighted.

Some pieces explored skewness and kurtosis.

Other notable posts were:


In addition to being a good year for books on R, there was another successful R/Finance conference, the appearance of the BurStFin package on CRAN, and the debut of CambR.

Potentially useful items are:


There were three posts about Value at Risk and Expected Shortfall:


There were explanations of Bayesian statistics and the decidedly non-Bayesian concept of p-values.

The idea of limits appeared in the posts on:


The Tyger

What immortal hand or eye
Could frame thy fearful symmetry?

from “The Tyger” by William Blake

The Seeker

I’ve looked under chairs
I’ve looked under tables
I’ve tried to find the key
To fifty million fables

from “The Seeker” by Pete Townshend


and if you think that you can tell a bigger tale
I swear to God you’d have to tell a lie…

from “Swordfishtrombone” by Tom Waits

I Am the Ride

And they asked if I believe
And do the angels really grieve

from “I Am the Ride” by Chris Smithers

Long Tail Cat

Long tailed cat sitting by the old rocking chair
He don’t realize that there’s a danger there

from “Long Tail Cat” by Kenny Loggins

Hold You in My Arms

Don’t prophesize
I could hold you in my arms
I could hold you forever

from “Hold You in My Arms” by Ray LaMontagne


the price you pay for the chains you refuse

from “Beeswing” by Richard Thompson

Soy Luz y Sombra

Preguntale al polvo de donde nacimos.
Preguntale al bosque que con la lluvia crecimos.

Ask the dust from which we were born.
Ask the forest with which we grew in the rain.

from “Soy Luz y Sombra” (I am Light and Shadow)


It turned out to be the howling of a dog
Or a wolf, to be exact.
The sound sent shivers down my back

from “Furr” by Eric Earley

Lessons of the War: Naming of Parts

Today we have naming of parts. Japonica
Glistens like coral in all of the neighbouring gardens,
And today we have naming of parts.

from “Lessons of the War: Naming of Parts” by Henry Reed

We Learned the Sea

You take the wheel one more time like I showed you
We’ve reached the strait once even I could not go through

from “We Learned the Sea” by Dar Williams

Hold on, Hold on

The most tender place in my heart is for strangers
I know it’s unkind but my own blood is much too dangerous

from “Hold On, Hold On” by Neko Case

Romeo and Juliet

He finds a convenient street light, steps out of the shade
Says something like, “You and me babe, how about it?”

from “Romeo and Juliet” by Mark Knopfler

Walk Between the Raindrops

You’re old enough to make a choice
It’s just that in between all the words on the screen
I doubt you’ll ever hear a human voice

from “Walk Between the Raindrops” by James McMurtry

Down the Mountain

I’m a poor wayfarin’ stranger
I have nothin’ left to lose
I have fallen down the mountain
Wretched righteous, flesh for fools

from “Down the Mountain” by Robin E. Contreras

The Facts about Jimmy

He’ll say you get just what you get
The simple truth is always the best
Don’t you see what’s done is done

from “The Facts about Jimmy” by Shawn Colvin & John Leventhal

Short People

Don’t want no Short People
‘Round here

from “Short People” by Randy Newman

Camel Walk

Yo ye pharoahs, let us walk
Through this barren desert, in search of truth
And some pointy boots, and maybe a few snack crackers.

from “Camel Walk” by Rick Miller

Idiot Wind

They say I shot a man named Gray, and took his wife to Italy.
She inherited a million bucks, and when she died it came to me.
I can’t help it if I’m lucky.

from “Idiot Wind” by Bob Dylan

You Cannot Win if You Do Not Play

I saw a little teddy bear.
Well, I said to myself,
“I know what I want. I gotta get a bear some way.”

from “You cannot win if you do not play” by Steve Forbert

People’s Parties

Some are watching it from the wings
Some are standing in the center

–from “People’s Parties” by Joni Mitchell

Thank you

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.

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