Hell is new and improved. The R Inferno has been revised.  If you don’t know of it, it is a short explanation of a few trouble spots when using the R language.  Somehow the short explanation grew to approach book-length. It can be found at the usual place: http://...

In “What the hell is a variance matrix?” I talked about the basics of variance matrices and highlighted challenges for estimating them in finance.  Here we look more deeply at the most popular estimation technique. Models for variance matrices The types of variance estimates that are used in finance can ...

Executive summary: Extremely useful for new users, informative to even quite seasoned users. Refereeing Once upon a time a publisher asked if I would referee a book (unspecified) about R.  In an instance that can only be described as psychotic I said yes.  That bit of insanity turned out to ...

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 →

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 ...

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 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 ...

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 ...

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 ...

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 ...

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 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. ...