Publications by Pat
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 that they expected the p...
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Review of “The Origin of Financial Crises” by George Cooper
The subtitle is “Central banks, credit bubbles and the efficient market fallacy”. Executive summary This is much too important of a book to remain as obscure as it is. Besides, it is quite a fun read. It talks about two subjects: Why markets for goods and services tend toward equilibrium but financial markets do not. Why central banks are...
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Low (and high) volatility strategy effects
Does minimum variance act differently from low volatility? Do either of them act like low beta? What about high volatility versus high beta? Inspiration Falkenblog had a post investigating differences in results when using different strategies for low volatility investing. Here we look not at a single portfolio of a given strategy over time...
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Beta is not volatility
The missing link between beta and volatility is correlation. Previously “4 and a half myths about beta in finance” attempted to dislodge several myths about beta, including that beta is about volatility. “Low (and high) volatility strategy effects” showed a plot of beta versus volatility for stocks in the S&P 500 for estimates from 2006.�...
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Replacing market indices
If equity markets suddenly sprang into existence now, would we create market indices? I’m doubtful. Why an index? The Dow Jones Industrial Average was born in 1896. This was when computers were humans with adding machines (but they did do parallel processing). At that point boiling “the market” down to a single number had value. The two...
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Betas of the low vol cohorts
How did the constraints affect portfolio betas, and how did the betas change over time? Previously “Low (and high) volatility strategy effects” created 6 sets of random portfolios — the so-called low vol cohorts — as of 2007 and showed their performance up to about a month ago. “Rebalancing the low vol cohorts” looked at how much turn...
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Information flows like water
Guiding a ship, it takes more than your skill Spark David Rowe’s Risk column this month is about data leverage. The idea is that you are leveraging your data if you are using it to answer questions that are too demanding of information. The piece reminded me of a talk that Dave gave a few years ago, and he was kind enough to remind me of his te...
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A variance campaign that failed
they ought at least be allowed to state why they didn’t do anything and also to explain the process by which they didn’t do anything. First blush One of the nice things about R is that new statistical techniques fall into it. One such is the glasso (related to the statistical lasso) which converts degenerate variance matrices into positive ...
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Cross-sectional skewness and kurtosis: stocks and portfolios
Not quite expected behavior of skewness and kurtosis. The question In each time period the returns of a universe of stocks will have some distribution — distributions as displayed in “Replacing market indices” and Figure 1. Figure 1: A cross-sectional distribution of simple returns of stocks. In particular they will have values for skewnes...
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Portfolio diversity
How many baskets are your eggs in? Meucci diversity Attilio Meucci directly addresses the adage: Don’t put all your eggs in one basket. His idea is to think of your portfolio as a set of subportfolios that are each uncorrelated with the rest. If your portfolio can be configured to have a lot of roughly equally weighted subportfolios, then y...
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