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Feb
20
comment Fama-Macbeth second step confusion
@ppidosaurus I think it should be standard error of lamda instead of standard deviation.
Feb
20
comment Fama-Macbeth second step confusion
@Freddorick You say "They are the same for each cross-sectional regression". I thought there are two ways to do it. You could either estimate the time series regression over the whole period once or you could do rolling regressions. I thought the rolling regression approach was more common, TBH.
Feb
1
comment Is it possible to deal with non-normal distribution in Black-Litterman model?
@vanguard2k Suppose MVN(u, sigma) represents the multivariate normal distribution and MVLN(u*, sigma*) is what you get if you transform it to a multivariate log normal. Both u* and sigma* depend on u. This makes writing the optimization problem more challenging.
Jan
29
comment Is it possible to deal with non-normal distribution in Black-Litterman model?
@vanguard2k I've tried to do the reverse-engineer assuming that prices were multivariate log normal instead of multivariate normal. I wasn't that happy with it. I think it can't hurt to think about what is an appropriate prior, but once you start mixing in all kinds of different assets (equities, fixed income, options), the reverse engineer method of constructing the prior becomes a bit unwieldy I think.
Jan
11
comment How to implement dummy variables into GARCH(1,1) model from structural breaks (ICSS)
He could write his own log-likelihood function for the Garch and then use Matlab to optimize.
Dec
16
comment Confusion on stationarity vs deterministic trend
I'm not sure your point about detrending a difference stationary process is that clear.
Dec
3
comment Estimate Beta of CAPM from Implied Volatility?
There's a number of papers on using option-implied betas to explain the stock returns.
Nov
11
comment Intuitive explanation of stochastic portfolio theory
@Richard I wasn't familiar with this work. Thanks for at least pointing me in the direction to it.
Nov
3
comment How to compute simple and log portfolio returns?
@slaw You're right about asset log returns not equaling the portfolio log returns. But it's a feature, not a bug. Log returns are easy to work with through time, not by cross-section. You have to convert asset log returns to arithmetic to calculate the arithmetic portfolio return. For rebalancing, I can't recall any reference or resource. Like I said, just think it through. It is too basic for this site to bother with. The investopedia article is here: investopedia.com/walkthrough/corporate-finance/4/return-risk/…
Nov
3
comment How to compute simple and log portfolio returns?
@slaw You haven't made clear what is wrong with the Zivot notes. If you want other sources, any college corporate finance textbook will have the calculation as well. I found it on investopedia also. For rebalancing, you really just need to spend a momentum thinking about it. Log returns are a little trickier. You need to calculate the portfolio arithmetic return first. If you need portfolio log returns you can convert after.
Oct
20
comment Variable becomes more significant when more variables are included
This is probably more appropriate for stats.stackexchange.com
Oct
16
comment How to estimate the beta of corporations?
Damodaran has a lot of stuff on his website too.
Oct
14
comment Annualized Sharpe Ratio calculation
I would consider @bushmanov's 64 ways to calculate SR to be the most useful point so far. Who really cares if you don't get his number exactly?
Oct
14
comment Annualized Sharpe Ratio calculation
Try: calculate the CAGR of the index, then subtract the average risk-free rate (not logged or de-annualized), and divide by the daily arithmetic (not log) standard deviation times the square root of 250 or 252.
Oct
13
comment French and Fama Three Factor Model - What is the correct formula?
Because I forgot! Now fixed.
Oct
7
comment How to interpret regression coefficients with dummy explanatory variables?
Based on what is said in @SRKX's answer, the 2.4% is mistaken.
Oct
7
comment How to interpret regression coefficients with dummy explanatory variables?
@jeffrey Your interpretation of the dummy is correct. You were mistaken on the first interpretation as SRKX points out. However, if I saw a beta that low, it would make me pause and re-evaluate the results. Note that there is a large literature on post earnings announcement drift. The event study approach is quite popular.
Oct
7
comment How to interpret regression coefficients with dummy explanatory variables?
@SRKX Including a dummy variable in a linear regression is not the same thing as mixing linear and logistic regression. In fact, I don't even know what it would mean to mix the two.
Sep
29
comment How to perform risk budgeting for non-linear portfolios?
See papers.ssrn.com/sol3/papers.cfm?abstract_id=2276632 and papers.ssrn.com/sol3/papers.cfm?abstract_id=1358533
Sep
25
comment Tests for Mean Reversion in a Portfolio Rebalancing
You should read up on cointegration. Learn about the Engle-Granger test. If your portfolio weights are proportion to regression coefficients, then it should be similar to what you're talking about wrt testing for mean-reversion in a portfolio of assets.