Tag Archives: statistical factor model
Variance matrix differences
Torturing portfolios to give different volatilities between a factor model and Ledoit-Wolf shrinkage. Previously There have been posts on: “What the hell is a variance matrix?” factor models Ledoit-Wolf shrinkage Question Two of the several ways to produce an estimate of the variance matrix of asset returns is a statistical factor model and Ledoit-Wolf shrinkage. … Continue reading
The guts of a statistical factor model
Specifics of statistical factor models and of a particular implementation of them. Previously Posts that are background for this one include: Three things factor models do Factor models of variance in finance The BurStFin R package The quality of variance matrix estimation The problem Someone asked me some questions about the statistical factor model in … Continue reading
How to add a benchmark to a variance matrix
There is a good way and a bad way to add a benchmark to a variance matrix that will be used for optimization and similar operations. Our examination sheds a little light on the process of variance matrix estimation in this realm. Role of benchmarks Investing Benchmarks are common in investment management. It’s my opinion … Continue reading
Posted in Quant finance, R language
Tagged benchmark, Ledoit-Wolf shrinkage, statistical factor model, variance matrix
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Three things factor models do
Factor models are heavily used in finance to create variance matrices. Here’s why. Factor models: Provide non-degenerate estimates Save space Quantify sources of risk Non-degenerate estimates First off, what does this mean? The technical term is that you want your estimate of the variance matrix to be positive definite. In practical terms what that means … Continue reading
Posted in Quant finance
Tagged factor model, Ledoit-Wolf shrinkage, statistical factor model
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The quality of variance matrix estimation
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 to me privately … Continue reading
Posted in Quant finance, R language
Tagged Ledoit-Wolf shrinkage, statistical factor model, variance matrix
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The BurStFin R package
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 a three-dimensional array out … Continue reading
Posted in Quant finance, R language
Tagged BurStFin, Ledoit-Wolf shrinkage, statistical factor model, variance estimation
9 Comments
