# Blog Archives

## Paying interest and the number e

January 24, 2011
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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...

## Normal market accidents

January 17, 2011
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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...

## The number 1 novice quant mistake

January 12, 2011
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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...

## Some market predictions

January 6, 2011
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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...

## Revised market prediction distributions

January 4, 2011
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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...

## Creating prediction distributions

January 4, 2011
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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...

## Blog year 2010 in review

December 30, 2010
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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...

## The tightrope of the random walk

December 27, 2010
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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...

## Some quibbles about “The R Book” by Michael Crawley

December 13, 2010
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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...

## Bear hunting

December 6, 2010
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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...