Category Archives: Quant finance
Bear hunting
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
Were stock returns really better in 2007 than 2008?
We know that the S&P 500 was up a little in 2007 and down a lot in 2008. So on the surface the question seems really stupid. But randomness played a part. Let’s have a go at deciding how much of a part. Figure 1: Comparison of 2007 and 2008 for the S&P 500. Statistical … Continue reading
Backtesting — almost wordless
On Tuesday I gave a talk at the Thalesians entitled “Effective backtesting”. You can get the annotated slides but below is an almost wordless introduction to backtesting. Introduction Figure 1. When you backtest, you attempt to see how an investment strategy would have worked during some historical period of time. We can think of backtesting … Continue reading
Posted in almost wordless, Quant finance, Random portfolios
Tagged backtesting, outperformance
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American TV does cointegration
Fringe provides an excellent example of cointegration. This is a television show in which there are two adjacent universes. The universes are almost alike but not exactly. Now, everyone knows that history is chaotic. If a butterfly does an extra flap of its wings, then that difference spreads out to change subsequent events everywhere. But … Continue reading
Anomalies meet volatility
Isn’t the horse facing the cart? “A New Look At Minimum Variance Investing” by Bernd Scherer (SSRN version) looks at a few aspects of minimum variance portfolios. We’ve been in this neighborhood before with The volatility puzzle solved? This post contains some comments on Bernd’s paper. Efficient frontiers My first concern with the paper is … Continue reading
A tale of two returns
It was the best of times, it was the worst of times. As you may have guessed, this is a mashup of a novel by Charles Dickens and an explanation of financial returns. The key plot element of A Tale of Two Cities is that there are two men, Charles Darnay and Sydney Carton, who … Continue reading
Posted in Quant finance, R language
Tagged aggregate returns, arithmetic return, arithmetic return vs geometric return, continuously compounded returns, geometric return, geometric return vs arithmetic return, gross return, log return, log return vs simple return, net return, simple return, simple return vs log return, total return
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Ancient portfolio theory
Before we get to the meat of the subject, I just have to comment on the “modern” of Modern Portfolio Theory. Figure 1: Modern telephone switch Figure 1 shows us a modern telephone switch. As a bonus we get to see some modern women. Why don’t we have “portfolio theory” instead of “Modern Portfolio Theory”? … Continue reading
Implied alpha — almost wordless
We have a portfolio with weights A=20%, B=60%, C=20%. That we have this particular portfolio is really a market prediction. What are the returns that the portfolio is “expecting”? In technical terms, we want the implied alpha of the portfolio (found via reverse optimization). We’ll explore this in a mostly pictorial fashion. Eventually we do … Continue reading
A quant review of “The Quants” by Scott Patterson
There were giant mutant quants destroying every … Oh, sorry. That was ants not quants, and it was a Japanese movie not a book. Given my blog’s remit, it seems obligatory to review this book. The full title is significant. It is “The Quants: How A New Breed Of Math Whizzes Conquered Wall Street And … Continue reading
