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 constituents of the S&P 500, so we can compare our fund return to the return of the index. Figure 1: 2010 returns of: the fund and … Continue reading
Portfolio Probing
Performance measurement is about decisions
Posted in Performance, R language, Random portfolios
Tagged investment performance measurement, luck versus skill
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Review of “Saving Capitalism from Short-Termism” by Alfred Rappaport
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 feasible and powerful. Culprits of the crisis The book starts with an accounting of the culprits who caused the financial crisis of 2007-20??. Pretty much everyone, … Continue reading
Posted in Book review, Fund management in general
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Another look at autocorrelation in the S&P 500
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 returns” led to considering the possibility of autocorrelation in the returns. I estimated an AR(1) model through time and added a naive confidence interval to the … Continue reading
Posted in Quant finance, R language
Tagged autocorrelation, mean reversion, S&P 500, variance compression
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The mystery of volatility estimates from daily versus monthly returns
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 that using daily data to estimate volatility would be equivalent to using monthly data except with less variability. Dave, the Investment Performance Guy, proposed the exquisitely … Continue reading
Posted in Quant finance, R language
Tagged annualize, autocorrelation, S&P 500, variance compression, volatility
18 Comments
Some new ideas in financial mathematics
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 intention of destabilizing the intellectual structure that has been erected on top of them and to demonstrate how a randomly generated portfolio can beat “the market,” … Continue reading
Variability of volatility estimates from daily returns
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. Here is a quick look. Figure 1 shows the variability (and a 95% confidence interval (gold lines) from a bootstrap) of the volatility estimate (black line) … Continue reading
Two sentences from John Kay
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 swaps. Perhaps the “something nicer” which should replace capitalism is a more nuanced – and more accurate – account of capitalism itself. The sentences that surround … Continue reading
Posted in Economics
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News Analytics Workshop and other events
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 try to understand that interaction. Researchers from CARISMA at Brunel University and their collaborators — including people from Thomson Reuters and Ravenpack — will be the … Continue reading
Posted in Events
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Risk parity
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 the portfolio variance. Two operations There are two cases in creating a risk parity portfolio: the universe is the asset categories the universe is the assets … Continue reading
Posted in Fund management in general, Quant finance, R language
Tagged equal risk contribution, risk parity
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Governors and stability
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 Clerk Maxwell’s analysis of governors in steam engines and the governors of central banks. Both types of governors have the task of bringing a system into … Continue reading
Posted in Economics
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