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 ...

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 →

A few weeks ago I have mentioned about an interesting volatility prediction. It is based on two periods of historical volatility (standard deviation). The remaining question was – does it really works? I could not give the answer, because I didn’t have VIX futures data at that time. Later on, ...

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 ...

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 ...

quanttrader.info is a good quantitative repository, where I found an idea about seasonal spreads play. The idea of seasonal pair trading differs from pairs trading in a way, that it doesn’t try to find deviation from the spread’s mean, but it looks at seasonal spread patterns. In ...

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 ...

R’s default theme of the HTML help pages is too plain for me to read, but we can easily modify the theme, which is essentially a CSS file. You can find the file under: file.path(R.home('doc'), 'html', 'R.css') Simply replace this file with my version: ...

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 ...

Here we give details and code for the prediction distributions exhibited in yesterday’s blog post Tis the season to predict. Eight years of returns The equity indices use daily closing levels from the start of 2003.  This data comes from Yahoo. A roughly equivalent technique of selecting the last 2000 daily ...

The blog year started in August and consists of 30-something posts.  Here is a summary. Quant concepts backtesting: Backtesting — almost wordless cointegration: American TV does cointegration efficient frontier: Anomalies meet volatility implied alpha: Implied alpha — almost wordless portfolio theory: Ancient portfolio theory random walk: The tightrope of the random walk ...

During last two sessions (December 23th and 27th), VIX index posted returns (close to close) above 6 %. My question is – what return can we expect next day after such event? As you can see from the graph above, expected return is positive. During 1995-2010 were 53 such events and mean return was 1.02 % [...]

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 friend recently bought The R Book and I said I would tell him of problems that I’ve noticed with it.  You can eavesdrop. Page 4 The word “library” is used instead of “package”.  This (common)  error substantially raises the blood pressure of some people — probably to an unwarranted extent. ...

The Joy of Stats really is a joy.  It will be shown on BBC4, apparently scheduled for December 7.  (That date comes from Hans Rosling on twitter, I haven’t found scheduling evidence at the BBC.) I saw its debut at the Royal Statistical Society on World Statistics Day. Here is ...

Many from the R world will know The R Inferno. Abstract: If you are using R and you think you’re in hell, this is a map for you. A newly minted inferno is The 9 circles of scientific hell. Most amusing to me is Circle 4: p-value fishing, the punishment of ...