Quant finance

Cross-sectional skewness and kurtosis: stocks and portfolios

April 30, 2012 | Pat

Not quite expected behavior of skewness and kurtosis. The question In each time period the returns of a universe of stocks will have some distribution — distributions as displayed in “Replacing market indices” and Figure 1. Figure 1: A cross-sectional distribution of simple returns of stocks. In particular they will have values for ... [Read more...]

A variance campaign that failed

April 23, 2012 | Pat

they ought at least be allowed to state why they didn’t do anything and also to explain the process by which they didn’t do anything. First blush One of the nice things about R is that new statistical techniques fall into it.  One such is the glasso (related ...
[Read more...]

Betas of the low vol cohorts

April 4, 2012 | Pat

How did the constraints affect portfolio betas, and how did the betas change over time? Previously “Low (and high) volatility strategy effects” created 6 sets of random portfolios — the so-called low vol cohorts — as of 2007 and showed their performance up to about a month ago. “Rebalancing the low vol cohorts” looked ... [Read more...]

Beta is not volatility

March 26, 2012 | Pat

The missing link between beta and volatility is correlation. Previously “4 and a half myths about beta in finance” attempted to dislodge several myths about beta, including that beta is about volatility. “Low (and high) volatility strategy effects” showed a plot of beta versus volatility for stocks in the S&P 500 ... [Read more...]

Low (and high) volatility strategy effects

March 23, 2012 | Pat

Does minimum variance act differently from low volatility?  Do either of them act like low beta?  What about high volatility versus high beta? Inspiration Falkenblog had a post investigating differences in results when using different strategies for low volatility investing.  Here we look not at a single portfolio of a ... [Read more...]

The quality of variance matrix estimation

March 12, 2012 | Pat

A bit of testing of the estimation of the variance matrix for S&P 500 stocks in 2011. Previously There was a plot in “Realized efficient frontiers” showing the realized volatility in 2011 versus a prediction of volatility at the beginning of the year for a set of random portfolios.  A reader commented ... [Read more...]

The shadows and light of models

March 5, 2012 | Pat

How wide is the darkness? Uses of models The main way models are used is to: shine light on the “truth” We create and use a model to learn how some part of the world works. But there is a another use of models that is unfortunately rare — a use ... [Read more...]

A minimum variance portfolio in 2011

February 29, 2012 | Pat

2011 was a good vintage for minimum variance, at least among stocks in the S&P 500. Previously The post “Realized efficient frontiers” included, of course, a minimum variance portfolio.  That portfolio seemed interesting enough to explore some more. “What does ‘passive investing’ really mean” suggests that minimum variance should be considered ... [Read more...]

Realized efficient frontiers

February 27, 2012 | Pat

A look at the distortion from predicted to realized. The idea The efficient frontier is a mainstay of academic quant.  I’ve made fun of it before.  This post explores the efficient frontier in a slightly less snarky fashion. Data The universe is 474 stocks in the S&P 500.  The predictions ... [Read more...]

The BurStFin R package

February 16, 2012 | Pat

Version 1.01 of BurStFin is now on CRAN. It is written entirely in R, and meant to be compatible with S+. Functionality The package is aimed at quantitative finance, but the variance estimation functions could be of use in other applications as well. Also of general interest is threeDarr which creates ...
[Read more...]

A slice of S&P 500 kurtosis history

February 13, 2012 | Pat

How fat tailed are returns, and how does it change over time? Previously The sister post of this one is “A slice of S&P 500 skewness history”. Orientation The word “kurtosis” is a bit weird.  The original idea was of peakedness — how peaked is the distribution at the center.  That’... [Read more...]

The distribution of financial returns made simple

January 23, 2012 | Pat

Why returns have a stable distribution As “A tale of two returns” points out, the log return of a long period of time is the sum of the log returns of the shorter periods within the long period. The log return over a year is the sum of the daily ... [Read more...]

How to search the R-sig-finance archives

January 19, 2012 | Pat

A not unusual part of a response on the R-sig-finance mailing list is: “Search the list archives.” In principle that makes sense.  In practice it might not be clear what to do.  Now it should be. The list The R-sig-finance mailing list deals with the intersection of questions about the ...
[Read more...]

A slice of S&P 500 skewness history

January 16, 2012 | Pat

How symmetric are the returns of the S&P 500? How does the skewness change over time? Previously We looked at the predictability of kurtosis and skewness in S&P constituents.  We didn’t see any predictability of skewness among the constituents.  Here we look at skewness from a different angle. ... [Read more...]

Sensitivity of risk parity to variance differences

January 9, 2012 | Pat

Equal risk contribution of assets determines the asset weights given the variance matrix.  How sensitive are those weights to the variance estimate? Previously The post “Risk parity” gave an overview of the idea. In particular it distinguished the cases: the assets have equal risk contribution groups of assets have equal ... [Read more...]

The top 7 portfolio optimization problems

January 5, 2012 | Pat

Stumbling blocks on the trek from theory to practical optimization in fund management. Problem 1: portfolio optimization is too hard If you are using a spreadsheet, then this is indeed a problem. Spreadsheets are dangerous when given a complex task.  Portfolio optimization qualifies as complex in this context (complex in data ...
[Read more...]

Market predictions for years 2011 and 2012

January 2, 2012 | Pat

A review of market predictions and results for 2011, and a calibration for 2012 predictions (of 19 equity indices plus oil). Previously One year ago the post “Revised market prediction distributions” presented plots showing the variability of various markets assuming no market-moving forces. The follow-up post “Some market predictions enhanced some of those ... [Read more...]

Volatility estimation and time-adjusted returns

December 15, 2011 | Pat

Do non-trading days explain the mystery of volatility estimation? Previously The post “The volatility mystery continues” showed that volatility estimated with daily data tends to be larger (in recent years) than when estimated with lower frequency returns. Time adjusting One of the comments — from Joseph Wilson — was that there is ... [Read more...]

The volatility mystery continues

December 5, 2011 | Pat

How do volatility estimates based on monthly versus daily returns differ? Previously The post “The mystery of volatility estimates from daily versus monthly returns” and its offspring “Another look at autocorrelation in the S&P 500″ discussed what appears to be an anomaly in the estimation of volatility from daily versus ... [Read more...]

Alpha decay in portfolios

November 30, 2011 | Pat

How does the effect of our expected returns change over time?  This is not academic  curiosity, we want to know in the context of our portfolio if we can.  And we can — we visualize the effect of expected returns in situ. First step The idea is to look at the ... [Read more...]
1 2 3 4

Never miss an update!
Subscribe to R-bloggers to receive
e-mails with the latest R posts.
(You will not see this message again.)

Click here to close (This popup will not appear again)