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 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 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 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 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. [...]
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 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 [...]