Blog Archives

Normal market accidents

January 17, 2011
By
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...

Read more »

The number 1 novice quant mistake

January 12, 2011
By
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...

Read more »

Some market predictions

January 6, 2011
By
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...

Read more »

Revised market prediction distributions

January 4, 2011
By
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...

Read more »

Creating prediction distributions

January 4, 2011
By
Creating prediction distributions

Here we give details and code for the prediction distributions exhibited in yesterday’s blog post Tis the season to predict. Eight years of returns The equity indices use daily closing levels from the start of 2003.  This data comes from Yahoo. A roughly equivalent technique of selecting the last 2000 daily prices is used for … Continue reading...

Read more »

Blog year 2010 in review

December 30, 2010
By
Blog year 2010 in review

The blog year started in August and consists of 30-something posts.  Here is a summary. Quant concepts backtesting: Backtesting — almost wordless cointegration: American TV does cointegration efficient frontier: Anomalies meet volatility implied alpha: Implied alpha — almost wordless portfolio theory: Ancient portfolio theory random walk: The tightrope of the random walk returns: A tale … Continue reading...

Read more »

The tightrope of the random walk

December 27, 2010
By
The tightrope of the random walk

We’re really interested in markets, but we’ll start with a series of coin tosses.  If the coin lands heads, then we go up one; if it lands tails, we go down one. Figure 1: A coin toss path.Figure 1 is the result of one thousand coin flips.  It is a random walk. The R command … Continue reading...

Read more »

Some quibbles about “The R Book” by Michael Crawley

December 13, 2010
By
Some quibbles about “The R Book” by Michael Crawley

A friend recently bought The R Book and I said I would tell him of problems that I’ve noticed with it.  You can eavesdrop. Page 4 The word “library” is used instead of “package”.  This (common)  error substantially raises the blood pressure of some people — probably to an unwarranted extent. An R package is … Continue reading...

Read more »

Bear hunting

December 6, 2010
By
Bear hunting

When were there bear and bull markets in US stocks since 1950? Smoothing While we’d really like to estimate the expected return at each point in time, finding bear markets is ambitious enough.  The plan starts by smoothing the daily returns through time, as in Figure 1. Figure 1: Smoothed returns with a 4 year … Continue reading...

Read more »

Joy of Stats coming soon

November 29, 2010
By
Joy of Stats coming soon

The Joy of Stats really is a joy.  It will be shown on BBC4, apparently scheduled for December 7.  (That date comes from Hans Rosling on twitter, I haven’t found scheduling evidence at the BBC.) I saw its debut at the Royal Statistical Society on World Statistics Day. Here is a five minute excerpt: You … Continue reading...

Read more »