Highlights of the blog over the past year.
Most popular posts
The posts with the most hits during the year.
- The top 7 portfolio optimization problems
- A tale of two returns (posted in 2010)
- A practical introduction to garch modeling
- A look at Bayesian statistics
- A comparison of some heuristic optimization methods
- The distribution of financial returns made simple
- The number 1 novice quant mistake (posted in 2011)
- Market predictions for years 2011 and 2012
- What the hell is a variance matrix? (posted in 2010)
- The BurStFin R package
- Beta is not volatility
- Review of “Models. Behaving. Badly.” by Emanuel Derman
- The mystery of volatility estimates from daily versus monthly returns (posted in 2011)
- A slice of S&P 500 skewness history
- What does ‘passive investing’ really mean
- The quality of variance matrix estimation
- Highlights of R in Finance 2012
Most under-valued posts
There is probably no other thing I saw in 2012 with more power to improve the world than The Origin of Financial Crises by George Cooper. This explains why central banks are a necessary evil, and how they are currently more focused on the evil than the necessary.
My second nomination for under-valued is the post that explains several ways that random portfolios can change fund management for the better.
Finally there’s the post that proposes a simple thing that would improve the prospects of prospective fund managers.
Book reviews
Table 1 summarizes (and has links to) the reviews of books during the year.
Table 1: Recommendations of reviewed books.
| title | author | recommended |
| Tao Te Programming | Patrick Burns | have a guess |
| The Origin of Financial Crises | George Cooper | highly |
| Models. Behaving. Badly. | Emanuel Derman | yes |
| R For Dummies | Andrie de Vries, Joris Meys | highly |
| Numerical Methods and Optimization in Finance | Manfred Gilli, Dietmar Maringer, Enrico Schumann | yes |
| Programming Graphical User Interfaces in R | Michael Lawrence, John Verzani | for some |
There was not only a review of R For Dummies but also a set of annotations for it.
Fund management
There was something possibly informative on portfolio diversity as well as some other attempts.
Thinking beyond indices was urged, which prompted the market portraits. Random portfolios can encourage the expanded viewpoint as well as improve fund management in other ways. There was also a report on a debate about fundamental indices.
Low volatility appeared a number of times.
Other posts included:
- Smoothing the market for alpha
- High frequency trading and the volume clock
- Random portfolios versus Monte Carlo
- Positional stocks
- Market predictions for years 2011 and 2012
Funny pages
The video in the review of Models. Behaving. Badly.:
Everything I’ve ever told you has been a lie, including that.
— the devil in “Bedazzled”
From “The battle of Fundamental Index”:
Gentlemen, you can’t fight in here. This is the war room.
Inferno-ish R also references Dr. Strangelove.
“Smoothing the market for alpha” has:
“This stuff is better than cotton candy, really it is. It’s made out of real cotton. Yossarian, you’ve got to help me make the men eat it. Egyptian cotton is the finest cotton in the world.”
from Catch-22 by Joseph Heller
Optimization
A pair of posts compared a number of heuristic optimizers in R. One used a tiny, unrealistic portfolio optimization problem. The other used a larger but still unrealistic portfolio optimization.
Performance
“Discovering the quality of portfolio decisions” shows how randomness can be used not only for performance measurement, but for attribution as well.
“Not fooled by randomness” points to a paper that studies the use of random portfolios for performance measurement.
There was also a post that discussed two papers from the Journal of Asset Management.
Quant finance
There was a suggestion of how to improve the ubiquitous long-short decile tests.
A number of posts talked about garch, most prominently “A practical introduction to garch modeling”. There’s a piece relating garch to cross sectional variability.
Volatility clustering impacts the distribution of returns. The satire in “The distribution of financial returns made simple” seems to have alluded some readers. What happens to returns when the net asset value goes negative? Try to avoid an easy mistake with returns.
Factor models were explained in general and more specifically. You can see how to add a benchmark to a variance. There was a glimpse at the quality of variance matrix estimation. Alpha alignment is a related concept.
Top problems with portfolio optimization were highlighted.
Some pieces explored skewness and kurtosis.
Other notable posts were:
- maximum drawdown seems too variable to be useful
- how should we assess the strength of sectors?
- realized efficient frontiers
- can jackknifing be useful?
- it’s a surprise to some that beta is not volatility
R
In addition to being a good year for books on R, there was another successful R/Finance conference, the appearance of the BurStFin package on CRAN, and the debut of CambR.
Potentially useful items are:
- how to search R-sig-finance (and other mailing list) archives
- a reminder that order is not rank
- a function to give you ntile groups (quartiles, deciles, …)
Risk
There were three posts about Value at Risk and Expected Shortfall:
- The basics of Value at Risk and Expected Shortfall
- The estimation of Value at Risk and Expected Shortfall
- A look at historical Value at Risk
Statistics
There were explanations of Bayesian statistics and the decidedly non-Bayesian concept of p-values.
The idea of limits appeared in the posts on:
- information flowing like water
- models being used to gauge what we can’t know
- exponential decay models being selected for their light touch on resources
Soundtrack
The Tyger
What immortal hand or eye
Could frame thy fearful symmetry?
from “The Tyger” by William Blake
The Seeker
I’ve looked under chairs
I’ve looked under tables
I’ve tried to find the key
To fifty million fables
from “The Seeker” by Pete Townshend
Swordfishtrombone
and if you think that you can tell a bigger tale
I swear to God you’d have to tell a lie…
from “Swordfishtrombone” by Tom Waits
I Am the Ride
And they asked if I believe
And do the angels really grieve
from “I Am the Ride” by Chris Smithers
Long Tail Cat
Long tailed cat sitting by the old rocking chair
He don’t realize that there’s a danger there
from “Long Tail Cat” by Kenny Loggins
Hold You in My Arms
Don’t prophesize
I could hold you in my arms
I could hold you forever
from “Hold You in My Arms” by Ray LaMontagne
Beeswing
the price you pay for the chains you refuse
from “Beeswing” by Richard Thompson
Soy Luz y Sombra
Preguntale al polvo de donde nacimos.
Preguntale al bosque que con la lluvia crecimos.Ask the dust from which we were born.
Ask the forest with which we grew in the rain.
from “Soy Luz y Sombra” (I am Light and Shadow)
Furr
It turned out to be the howling of a dog
Or a wolf, to be exact.
The sound sent shivers down my back
from “Furr” by Eric Earley
Lessons of the War: Naming of Parts
Today we have naming of parts. Japonica
Glistens like coral in all of the neighbouring gardens,
And today we have naming of parts.
from “Lessons of the War: Naming of Parts” by Henry Reed
We Learned the Sea
You take the wheel one more time like I showed you
We’ve reached the strait once even I could not go through
from “We Learned the Sea” by Dar Williams
Hold on, Hold on
The most tender place in my heart is for strangers
I know it’s unkind but my own blood is much too dangerous
from “Hold On, Hold On” by Neko Case
Romeo and Juliet
He finds a convenient street light, steps out of the shade
Says something like, “You and me babe, how about it?”
from “Romeo and Juliet” by Mark Knopfler
Walk Between the Raindrops
You’re old enough to make a choice
It’s just that in between all the words on the screen
I doubt you’ll ever hear a human voice
from “Walk Between the Raindrops” by James McMurtry
Down the Mountain
I’m a poor wayfarin’ stranger
I have nothin’ left to lose
I have fallen down the mountain
Wretched righteous, flesh for fools
from “Down the Mountain” by Robin E. Contreras
The Facts about Jimmy
He’ll say you get just what you get
The simple truth is always the best
Don’t you see what’s done is done
from “The Facts about Jimmy” by Shawn Colvin & John Leventhal
Short People
Don’t want no Short People
‘Round here
from “Short People” by Randy Newman
Camel Walk
Yo ye pharoahs, let us walk
Through this barren desert, in search of truth
And some pointy boots, and maybe a few snack crackers.
from “Camel Walk” by Rick Miller
Idiot Wind
They say I shot a man named Gray, and took his wife to Italy.
She inherited a million bucks, and when she died it came to me.
I can’t help it if I’m lucky.
from “Idiot Wind” by Bob Dylan
You Cannot Win if You Do Not Play
I saw a little teddy bear.
Well, I said to myself,
“I know what I want. I gotta get a bear some way.”
from “You cannot win if you do not play” by Steve Forbert
People’s Parties
Some are watching it from the wings
Some are standing in the center
–from “People’s Parties” by Joni Mitchell
Thank you
I’d like to thank those who have read the blog over the past year (and beyond). Special thanks go to those who
- subscribe to the RSS feed
- subscribe via email
- follow us on twitter
- have made comments
All the best in the coming year.
