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 There are past blog posts on: the idea of variance matrices factor models of variance The data in this post are from the blog posts: “Weight … Continue reading
Portfolio Probing
A test of Ledoit-Wolf versus a factor model
Posted in Quant finance, R language
Tagged covariance matrix, factor model, Ledoit-Wolf shrinkage, risk fraction, S&P 500, variance matrix
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Review of “Smart Swarm” by Peter Miller
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 Smart Swarm: Using animal behavior to change our world is interesting because it: describes many extraordinary decisions of animals. suggests a number of lessons that can … Continue reading
Posted in Book review, Fund management in general
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Risk fraction constraints and volatility
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” “Weight compared to risk fraction” The exact same sets of random portfolios are used in this post that were generated in the second of these. Payoff … Continue reading
Posted in Quant finance, R language, Random portfolios
Tagged risk fraction, S&P 500, variance partition
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Weight compared to risk fraction
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. That is not a problem if weights are a good proxy for risk. So the question is: how good of a proxy are they? To give … Continue reading
Posted in Quant finance, R language, Random portfolios
Tagged risk fraction, S&P 500, variance partition
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A bit of analysis of the Dow golden cross
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 into a statistical bootstrap in R. So here it is. Joshua informs us that a golden cross is when the 50-day moving average crosses above the … Continue reading
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Scoping out the financial universe
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 changed our view of the universe. He saw four moons orbiting Jupiter. This was good evidence that the universe did not revolve around the earth. Here … Continue reading
Posted in Fund management in general
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Unproxying weight constraints
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 think that is what we want to do because we are so used to doing it. But why should we care about the weight of assets? … Continue reading
Market beliefs
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 expect makes the expectation come true. The entire 13.5 minute talk is wonderful, but you can skip to about the 9 minute mark to experience the … Continue reading
Posted in Fund management in general
Tagged efficient market hypothesis, Michael Shermer
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The devil of overfitting
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 Let’s suppose that the true expected return over a period of time is described by a polynomial. We can easily do this in R. The first … Continue reading
The book of doom
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 billions of people. A solar storm cuts electricity to wide areas for weeks or months, and destroys satellites — including satnav (which have atomic clocks used … Continue reading
