Category Archives: Blog
Paying interest and the number e
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 + 1) = $2 What happens if instead the interest is calculated as 50% twice in the year? $1 * (1.5 * 1.5) = $2.25 After … Continue reading
In the blogosphere this week: sunshine and Vegas
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 thick, but I don’t see any problem. I see both these activities as buying positive skewness: paying a little now for an uncertain but big positive … Continue reading
Normal market accidents
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 market crash. For normal accidents to come into play, two conditions need to hold: the system is complex the system is tightly coupled Certainly the financial … Continue reading
Posted in R language, Risk
Tagged contagion, market crash, normal accident, too big to fail
1 Comment
Elsewhere in the blogosphere this week
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 that conditional on their average beauty rating, the women with more variable ratings get more interest. The post proposes a theory that there is less competition … Continue reading
Posted in Economics, Fund management in general
Tagged forecasting, price movement, volatility puzzle
1 Comment
The number 1 novice quant mistake
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 want returns, you should understand log returns versus simple returns. Here we will be randomly generating our “returns” (with R) and we will act as if … Continue reading
Boris The Banker explains efficient markets
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 relevant information has been taken into account in the price of items in the market — a stock market for example. Amy: Does it have any … Continue reading
Posted in Fund management in general
Tagged Boris The Banker, efficient market hypothesis, EMH, humor
1 Comment
Some market predictions
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 There is a “range forecast” on an Interactive Investor page of 5350 to 6565. It isn’t clear (to me at least) what this means, but I … Continue reading
Posted in Fund management in general, R language
Tagged 2011 market prediction, market prediction
2 Comments
Revised market prediction distributions
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 prediction distribution of levels of several equity indices (plus oil price) at the end of 2011 assuming nothing happens. That is, we’ve taken out market trends … Continue reading
Posted in Fund management in general, R language
Tagged 2011 market prediction, market prediction
4 Comments
Creating prediction distributions
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 in that post. For corrected plots and an explanation of the error, see Revised market prediction distributions.] Eight years of returns The equity indices use daily … Continue reading
Posted in Fund management in general, R language
Tagged garch simulation, loess, market prediction
4 Comments
Tis the season to predict
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 of several equity indices (plus oil price) at the end of 2011 assuming nothing happens. That is, we’ve taken out market trends and just left drift … Continue reading
Posted in Fund management in general
Tagged 2011 market prediction, market prediction
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