Articles by Pat

Thalesians, and other events

September 5, 2012 | Pat

Featured Thalesians, London 2012 September 12. Chia Tan on “Practical Financial Modeling”. Abstract: Financial modelling is not a competition in the mastery of complexity. Rather, the aim is to come up with the simplest models adequate to capture salient market features of traded products. There exists a wide gulf between material covered ...
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A look at Bayesian statistics

September 3, 2012 | Pat

An introduction to Bayesian analysis and why you might care. Fight club The subject of statistics is about how to learn.  Given that it is about the unknown, it shouldn’t be surprising that there are deep differences of opinion on how to go about doing it (in spite of ... [Read more...]

garch and long tails

August 27, 2012 | Pat

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 ... [Read more...]

Another comparison of heuristic optimizers

August 20, 2012 | Pat

A herd of heuristic algorithms is compared using a portfolio optimization. Previously “A comparison of some heuristic optimization methods” used two simple and tiny portfolio optimization problems to compare a number of optimization functions in the R language. This post expands upon that by using a portfolio optimization problem that ... [Read more...]

Highlights of R in Finance 2012

August 13, 2012 | Pat

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 ...
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Returns with negative net asset values

July 30, 2012 | Pat

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 nav1 … Continue reading →
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R Inferno-ism: order is not rank

July 26, 2012 | Pat

Do not use order when you want rank. Background The update of “A comparison of some heuristic optimization methods” is due to the bug that Luca Scrucca spotted. Actually, it is two bugs: I used order when I meant rank This somehow escaped being in The R Inferno   Problem What ...
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A comparison of some heuristic optimization methods

July 23, 2012 | Pat

A simple portfolio optimization problem is used to look at several R functions that use randomness in various ways to do optimization. Orientation Some optimization problems are really hard. In these cases sometimes the best approach is to use randomness to get an approximate answer. Once you decide to go ... [Read more...]

2 dimensions of portfolio diversity

July 16, 2012 | Pat

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 ... [Read more...]

A practical introduction to garch modeling

July 6, 2012 | Pat

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. ... [Read more...]

Random portfolios versus Monte Carlo

July 2, 2012 | Pat

What is the difference between Monte Carlo — as it is usually defined in finance — and random portfolios? The meaning of “Monte Carlo” The idea of “Monte Carlo” is very simple.  It is a fancy word for “simulation”. As usual, it is all too possible to find incredibly muddied explanations of ... [Read more...]

Two new, important books on R

June 22, 2012 | Pat

Two books were recently published that are sure to help R grow even faster. R has a reputation, partially deserved, for being hard to learn.  These books will help.  The first makes learning easier, the second can make learning less necessary for initiates. I have not yet touched either book. ... [Read more...]

To R or not to R, and other events

June 21, 2012 | Pat

New events To R, or not to R, that is the question The Statistical Computing Section of the Royal Statistical Society presents a one-day event on 2012 June 29. The details of the day.  See in particular the abstract for “Teaching statistics: a pain in the R?” by Andy Field — it involves ...
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Cross sectional spread of stock returns

June 18, 2012 | Pat

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 ... [Read more...]

Variability in maximum drawdown

June 4, 2012 | Pat

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 ... [Read more...]

Inferno-ish R

May 31, 2012 | Pat

CambR was nice enough to invite Markus Gesmann and me to speak at their event on Tuesday. My talk was Inferno-ish R. See also The R Inferno. Epilogue Subscribe to the Portfolio Probe blog by Email
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Jackknifing portfolio decision returns

May 28, 2012 | Pat

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 ... [Read more...]

Correlations and postive-definiteness

May 22, 2012 | Pat

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 ... [Read more...]

CambR and other upcoming events

May 21, 2012 | Pat

New events CambR (Cambridge UK R user group) 2012 May 29 6:30 PM for 7:00 PM start. Pat Burns “Inferno-ish R” Abstract: While R is wonderful, it is not uniformly wonderful. We highlight a few things generally found to be confusing, and outline the forces that have driven such imperfections. Markus Gesmann “Interactive charts ...
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Exponential decay models

May 17, 2012 | Pat

All models are wrong, some models are more wrong than others. The streetlight model Exponential decay models are quite common.  But why? One reason a model might be popular is that it contains a reasonable approximation to the mechanism that generates the data.  That is seriously unlikely in this case. ... [Read more...]
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