Blog Archives

Variability of predicted portfolio volatility

February 11, 2013
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Variability of predicted portfolio volatility

A prediction of a portfolio’s volatility is an estimate — how variable is that estimate? Data The universe is 453 large cap US stocks. The variance matrices are estimated with the daily returns in 2012. Variance estimation was done with Ledoit-Wolf shrinkage (shrinking towards equal correlation). Two sets of random portfolios were created.  In both … Continue reading...

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An infelicity with Value at Risk

February 4, 2013
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An infelicity with Value at Risk

More risk does not necessarily mean bigger Value at Risk. Previously “The incoherence of risk coherence” suggested that the failure of Value at Risk (VaR) to be coherent is of little practical importance. Here we look at an attribute that is not a part of the definition of coherence yet is a desirable quality. Thought … Continue reading...

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The components garch model in the rugarch package

January 28, 2013
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The components garch model in the rugarch package

How to fit and use the components model. Previously Related posts are: A practical introduction to garch modeling Variability of garch estimates garch estimation on impossibly long series Variance targeting in garch estimation The model The components model (created by Engle and Lee) generally works better than the more common garch(1,1) model.  Some hints about … Continue reading...

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Clustering and sector strength

January 21, 2013
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Clustering and sector strength

An exploration of the usefulness of sectors. Previously This subject was discussed in “S&P 500 sector strengths”. Idea Stocks are put into groups based on the sector that the company is considered to be in.  Cluster analysis is a statistical technique that finds groups.  If sectors really move together, then clustering should recover sectors.  Will … Continue reading...

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Market predictions for year 2013

January 7, 2013
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Market predictions for year 2013

Calibrations of 2013 predictions for 18 equity indices — plus some publicly available predictions. Orientation The distributions are an attempt to see the variability if there were no market-driving news for the whole year. Another way of thinking: mentally moving the distribution to center on a prediction gives a sense of the variability of results … Continue reading...

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Miles of iles

December 24, 2012
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Miles of iles

An explanation of quartiles, quintiles deciles, and boxplots. Previously “Again with variability of long-short decile tests” and its predecessor discusses using deciles but doesn’t say what they are. The *iles These are concepts that have to do with approximately equally sized groups created from sorted data. There are 4 groups with quartiles, 5 with quintiles … Continue reading...

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A look at historical Value at Risk

December 17, 2012
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A look at historical Value at Risk

Historical Value at Risk (VaR) is very popular because it is easy and intuitive: use the empirical distribution of some specific number of past returns for the portfolio. Previously “The estimation of Value at Risk and Expected Shortfall” included an R function to estimate historical VaR. Generating portfolios A useful tool to explore risk models … Continue reading...

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garch and the Algorithmic Trading Conference

December 10, 2012
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garch and the Algorithmic Trading Conference

The Imperial College Algorithmic Trading Conference was Saturday. Talks Massoud Mussavian Massoud gave a great talk on “Algo Evolution”.  It started with a historical review of how trading used to be done “by hand”.  It culminated in a phylogenetic tree of trading algorithms.  There was an herbivore branch and a carnivore branch. Robert Macrae Robert … Continue reading...

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Again with variability of long-short decile tests

December 6, 2012
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Again with variability of long-short decile tests

A simpler approach to producing the variability. Previously The post “Variability in long-short decile strategy tests” proposed a way of assessing the variability of strategy tests in which a long-short portfolio is created by equally weighting the top and bottom deciles. Improved idea Joe Mezrich suggests maintaining equal weights but bootstrapping the assets within the … Continue reading...

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Variability in long-short decile strategy tests

December 3, 2012
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Variability in long-short decile strategy tests

How to capture return variability when testing strategies with long-short deciles. Traditional practice Question: Does variable X have predictive power for our universe of assets? A common scheme of quants to answer the question is to form a series of portfolios over time.  The portfolio at each time point: is long the equal weighting of … Continue reading...

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