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I am trying to calculate the log returns of a dataset in R using the usual log differencing method. However, the calculated data is simply a vector of zeroes. I can't see what I'm doing wrong.

Here is the snippet showing what I'm doing

> prices <- data$cl
> head(prices)
[1] 1108.1 1095.4 1095.4 1102.2 1096.3 1096.7
>
>
> lrets <- log(lag(prices)) - log(prices)
> head(lrets)
[1] 0 0 0 0 0 0
> summary(lrets)
   Min. 1st Qu.  Median    Mean 3rd Qu.    Max. 
      0       0       0       0       0       0 

What am I doing wrong?

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2  
lrets <- diff(log(prices)) –  Vishal Belsare Feb 6 '12 at 11:55
1  
@VishalBelsare you should add that as an answer. –  Louis Marascio Nov 23 '12 at 15:42

3 Answers 3

up vote 7 down vote accepted

You are simply doing $log(S_t) - log(S_t) = 0$ for all $t$. Instead, try

> n <- length(prices);
> lrest <- log(prices[-1]/prices[-n])

Should do the trick.

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7  
Or the more traditional, fewer characters: diff(log(prices)) which also works when 'prices' is a matrix with times in the rows and assets in the columns. The other lesson is that 'lag' doesn't do what we naively expect it to do. –  Patrick Burns Feb 6 '12 at 10:54
    
To be sure that lag works as you expect, it is much safer to store your time series as zoo or xts objects: if you use vectors (or even ts objects), many operations will discard or ignore the timestamps. –  Vincent Zoonekynd Feb 6 '12 at 11:48
    
hadnt noticed the "diff" function yet. A handy one, indeed. –  AdAbsurdum Feb 6 '12 at 12:39
    
@PatrickBurns: +1 for your input. I preferred your more succinct syntax. Would have accepted that as an answer. –  Homunculus Reticulli Feb 6 '12 at 13:06
    
i have been using diff(log(prices)) for a while, but was starting to doubt as it seems almost noone use it. thanks :) –  edouard Jul 26 '12 at 17:35

I think the easiest method for calculating log returns is ROC from the TTR package:

> data(ttrc)
> roc <- ROC(ttrc[,"Close"])

http://cran.r-project.org/web/packages/TTR/

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An easy way to perform what you need is do it this way:

if your data are daily then :

> prices <- data$cl
> log_returns <- diff(log(prices), lag=1)

would provide you with daily log returns, if you change the $lag=1$ to $lag=5$ then you will get weekly moving log returns.

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While I have some experience in finance, I'm new to R (and this site). Question on this post, @aajajim: your suggestion looks very appealing, but another commenter suggests working in zoo, with which I am familiar. Since zoo allows for an irregular times series, how does your answer change if using zoo? –  W Barker Apr 15 at 18:28
    
Doesn't change at all, it's still the same code. At least for my zoo object the function he posted worked without any flaws. –  Olorun May 31 at 4:09

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