Posts Tagged ‘ Quant finance ’

garch and long tails

August 27, 2012
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garch and long tails

How much does garch shorten long tails? Previously Pertinent blog posts include: “A practical introduction to garch modeling” “The distribution of financial returns made simple” “Predictability of kurtosis and skewness in S&P constituents” Induced tails Part of the reason that the distributions of returns have long tails is because of volatility clustering.  It’s not really … Continue reading...

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Highlights of R in Finance 2012

August 13, 2012
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Highlights of R in Finance 2012

I unfortunately was not there, but we can vicariously enjoy it via the presentations that are posted on the conference website. Below is my take on the highlights (in chronological order). Peter Carl and Brian Peterson “Constructing Strategic Hedge Fund Portfolios” is wonderful from my perspective.  Promoting random portfolios is sure to win my heart.  … Continue reading...

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Returns with negative net asset values

July 30, 2012
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Returns with negative net asset values

How are returns calculated when net asset value goes negative? Previously In “A tale of two returns” we highlighted the similarities and differences of log returns versus simple returns. Positive valuation We create — in R — an example of net asset value at four times: > nav1 <- c(1000, 900, 950, 1010) > nav1 … Continue reading...

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2 dimensions of portfolio diversity

July 16, 2012
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2 dimensions of portfolio diversity

Portfolio diversity is a balancing act. Previously The post “Portfolio diversity” talked about the role of the correlation between assets and the portfolio.  The current post fills a hole in that post. The 2 dimensions asset-portfolio correlation Each asset in the universe has a correlation with the portfolio.  If there are any assets that have … Continue reading...

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A practical introduction to garch modeling

July 6, 2012
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A practical introduction to garch modeling

We look at volatility clustering, and some aspects of modeling it with a univariate GARCH(1,1) model. Volatility clustering Volatility clustering — the phenomenon of there being periods of relative calm and periods of high volatility — is a seemingly universal attribute of market data.  There is no universally accepted explanation of it. GARCH (Generalized AutoRegressive … Continue reading...

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Cross sectional spread of stock returns

June 18, 2012
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Cross sectional spread of stock returns

A look at a simplistic measure of stock-picking opportunity. Motivation The interquartile range (the spread of the middle half of the data) has recently been added to the market portrait plots.  Putting those numbers into historical context was the original impulse. However, this led to thinking about change in stock-picking opportunity over time. Data Daily … Continue reading...

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Variability in maximum drawdown

June 4, 2012
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Variability in maximum drawdown

Maximum drawdown is blazingly variable. Psychology Probably the most salient feature that an investor notices is the amount lost since the peak: that is, the maximum drawdown. Just because drawdown is noticeable doesn’t mean it is best to notice. Statistics The paper “About the statistics of the maximum drawdown in financial time series” explores drawdown … Continue reading...

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Jackknifing portfolio decision returns

May 28, 2012
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Jackknifing portfolio decision returns

A look at return variability for portfolio changes. The problem Suppose we make some change to our portfolio.  At a later date we can see if that change was good or bad for the portfolio return.  Say, for instance, that it helped by 16 basis points.  How do we properly account for variability in that … Continue reading...

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Correlations and postive-definiteness

May 22, 2012
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Correlations and postive-definiteness

On the way to another destination, I found some curious behavior with average correlations. The data Daily log returns from almost all of the constituents of the S&P 500 for years 2006 through 2011. The behavior Figure 1 shows the actual mean correlation among stocks for the set of years and the mean correlation with … Continue reading...

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Portfolio diversity

May 7, 2012
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Portfolio diversity

How many baskets are your eggs in? Meucci diversity Attilio Meucci directly addresses the adage: Don’t put all your eggs in one basket. His idea is to think of your portfolio as a set of  subportfolios that are each uncorrelated with the rest.  If your portfolio can be configured to have a lot of roughly … Continue reading...

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