Category Archives: R language
4 and a half myths about beta in finance
Much of what has been said and thought about beta in finance is untrue. Myth 1: beta is about volatility This myth is pervasive. Beta is associated with the stock’s volatility but there is more involved. Beta is the ratio of the volatility of the stock to the volatility of the market times the correlation … Continue reading
Posted in Quant finance, R language
Tagged beta in finance, Capital Asset Pricing Model, CAPM, statistical bootstrap
12 Comments
Review of “R Graphs Cookbook” by Hrishi Mittal
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 be a good thing. I … Continue reading
Paying interest and the number e
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
Normal market accidents
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 the system is tightly coupled Certainly the financial … Continue reading
Posted in R language, Risk
Tagged contagion, market crash, normal accident, too big to fail
1 Comment
The number 1 novice quant mistake
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 will act as if … Continue reading
Some market predictions
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 means, but I … Continue reading
Posted in Fund management in general, R language
Tagged 2011 market prediction, market prediction
2 Comments
Revised market prediction distributions
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 taken out market trends … Continue reading
Posted in Fund management in general, R language
Tagged 2011 market prediction, market prediction
4 Comments
Creating prediction distributions
Here we give details and code for the prediction distributions exhibited in yesterday’s blog post “Tis the season to predict”. [Revision: There was a problem with the plots published in that post. For corrected plots and an explanation of the error, see Revised market prediction distributions.] Eight years of returns The equity indices use daily … Continue reading
Posted in Fund management in general, R language
Tagged garch simulation, loess, market prediction
4 Comments
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 random walk. The R command … Continue reading
