Questions tagged [returns]

The asset rate of returns is the profit on a particular investment; it includes any change in the asset value, interest, commission or dividends and so, all other cash-flows which an investors receive or pays due to the investment.

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Understanding pooled VAR model

I encountered a paper by Vuolteenaho (2002) in which he uses pooled VAR model. I have some troubles understanding the idea. He uses firm level variables (log returns, ROE, etc.) and ultimately he ...
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340 views

kalman filter for a multifactor model in R

I am trying to set up a time varying factor model for the purpose of return decomposition via kalman filter. Following this example and slightly modifying it so as to accommodate for more than one ...
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240 views

VAR models for log-returns?

I am wondering if Vector Autoregression (and other autoregressive models) is a sound modelling for the daily (not high-frequency!) log-returns of time series from liquid financial markets. One can ...
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2k views

How to calculate returns of backtested strategy?

Lets say I have some strategy (long/short) backtested for certain period. Strategy has entries/exits only at the end of the day and may have overnight positions hold. Now I would like to compare ...
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74 views

robust regions in grid search

I have a strategy f that takes parameters x,y (for x,y taking values in integer ranges). I get two grids (of returns and volatility values) from computing f(xi,yi) for integer ranges x1 <= xi <= ...
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291 views

trading strategy outperforms passive strategy in absolute terms, but in returns vice versa. how could this be?

Background: I want to compare two trading strategies in term of profitability. The red one is an active trading strategy, which involves many entry and exit to a specific market. The blue one is a ...
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77 views

Econometrics - Granger Causality

Suppose we have two time series, if one has autocorrelations and the other is non stationary how do we test whether they Granger cause a returns series?
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119 views

Insignificant or significant explanatory power over risk adjusted returns?

Currently iam working on my master thesis which is about risk adjusted returns in the Asia Pacific REIT market. The goal of the paper is to determine/find variables that conceive explanatory power ...
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118 views

% Return on backtest with variable positions and notional amounts

I have a 14 year backtest for a systematic strategy that uses a static notional per each position. On any given day I could have multiple positions long and short and notional long and short. How do ...
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86 views

FRA-Strategy: Make 3-month and 1-year Excess returns comparable

I am trying to analyze an investment strategy that tries to exploit the empirical difference between forward interest rates and realized spot rates. I am using FRAs to capture the difference. I am ...
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231 views

Probability Density of Returns of Bonus Certificates

Could anyone please help me with the following? I need to generate a histogram (resp. probability density) of returns of a bonus-certificate. A bonus-certificate can be replicated by an underlying ...
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502 views

How to calculate standard deviation of continuously compounded four-year stock returns?

Currently I am preparing for quant interview and I encounter the following question in Heard on the street. Question: If the standard deviation of continuously compounded annual stock returns is $...
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102 views

Using central limit theorem to test whether population average return is the same, before and after the recession

This is the task I have been asked to do. I've read up on what central limit theorem (clt) is, but I feel like I'm missing something. The data I have is a matrix of monthly stock returns from 50 ...
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178 views

Intuitive explanation of geometric mean

Suppose that the 10 Year Treasury Yield Rate varies every trading day during the year X1 (which in practice is accurate) what is the intuitive explanation behind calculating the geometric mean using ...
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8k views

Calculating log-returns across multiple securities and time

I've been getting very confused on the topic of calculating returns. To get cumulative returns in time, log-returns are used, but apparently log-returns aren't used across different securities at a ...
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1answer
79 views

When modelling ARCH/GARCH effects, do we use excess returns?

When modelling ARCH/GARCH effects, do we use excess returns? Is it common in the literature to use excess returns when modelling volatility as opposed to raw return data?
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1answer
130 views

What is, here, the relationship between “compound” and “arithmetic return” and “volatility”?

I'm trying to find the exact (ie, not an approximate) relation between the "Compound Return", "Arithmetic Return", and the "Annualised Volatility" as given the assumptions below, and from there the ...
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160 views

Volatility Index for Industries

The VIX index is based on the S&P, I am wondering the feasibility of creating a VIX index for each of the S&P 500 Industries? Would this even be possible?
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3k views

Predicting stock returns with GARCH in Python

I have seen this post: Correctly applying GARCH in Python which shows how to correctly apply GARCH models in Python using the arch library. Now I am wondering how I ...
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1answer
222 views

portfolio returns when portfolio value is negative

I am being very stupid probably but I don't understand the following. Portfolio 1st Jan valued: -$100 A month later Portfolio 1st Feb valued: -$45 I calculate the return of the portfolio as, <...
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5k views

Calculate weekly returns from daily stock prices?

If I have log returns for a specific stock, then the weekly log return is the log of Friday's closing price minus the log of Monday's closing price, i.e. $R_{weekly} = log(Price_{Friday}) - log(Price_{...
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1answer
5k views

What are DGTW adjusted returns?

Many papers, e.g. in The Journal of Finance, discuss DGTW adjusted returns (or DGTW abnormal returns) instead of just returns. What are these and how does one compute them?
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223 views

Returns and logreturns differences

I have a time series of stock prices and I tried to calculate simple returns and log returns. However, I end up that simple returns has positive mean, but log returns has negative mean. Is it possible ...
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1answer
66 views

Derivation of the formula for $m$ compounding periods per year: $(1+\frac{i}{m})^{mt}$

A dollar return with interest $i$ invested for $T$ years with compounding interest frequency of $m$ times each year is: $$1*(1+\frac{i}{m})^{mt}.$$ My Question Why do we divide $i$ by $m$? Is this ...
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90 views

Jensen’s Inequality for returns on short positions

this is puzzling me. Say you have an asset A, that on day t+1 returns 1%, and then on day t+2 returns 1% again. If you invest $1 in A on day t (take a long position), then on day t+2 you have earned:...
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123 views

Why can we assume that asset return rates are normally (or lognormally) distributed?

In many theories of financial mathematics it is assumed that asset return rates are normally distributed (e.g. VaR models) or lognormally distributed (e.g. Black-Scholes model). In practice, asset ...
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1answer
555 views

What is the Probability Distribution of Max-Drawdown?

How to obtain the probability distribution of Maximum Drawdown, starting from the probability distribution of Daily Returns? Here the details: Suppose I have a time serie of N=1000 daily returns. ...
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1answer
91 views

What are the units of the variance of returns?

I am a little confused about the units of the variance of returns. One way to compute that would be to look at the units of returns- $$r=\frac{1}{\Delta t}\ln\frac{P(t+\Delta t)}{P(t)}=\text{...
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434 views

Should log returns be used in multilinear regressions?

As the title already says, should log returns, instead of simple returns, be used in regression analysis? In this case, I want to analyse the impact of specific factors (Dividend yield etc.) on the ...
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2answers
116 views

Does forecasting asset returns by default assumes non-stationarity of asset returns?

If we assume the assets returns are stationary then the best forecast can only be the mean of the distribution. But if we assume non-stationarity we are forecasting the mean parameter (assuming ...
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1answer
551 views

What are necessary adjustments to returns in CRSP?

I guess this is a pretty straight forward and basic question. I am using the entire CRSP universe from 1962-2016 and my goal is to replicate a research paper. However, I realized that the average (...
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1answer
1k views

How does one create an alpha signal

I am curious and want to do some personal research into alpha signals, but I couldn't find much relevant information. What I think will be the way to is to start with a return series, build a long- ...
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1answer
4k views

Calculating the returns of a long/short strategy

I feel like an idiot asking this but i haven't found the answer anywhere. I have backtestest a paris trading strategy, while calculating the returns of the strategy I run into some problems when the ...
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1answer
64 views

Adjust regression for thin trading

What procedures can I apply to control in a regression on company returns for thinly traded stocks? Is the inclusion of the SMB-factor a potential approach? Or just a dummy variable indicating if a ...
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1answer
58 views

Calculating the daily continuously compounded return from index values

Given I have 3 index values at time $t = 0, 1 , 2$, how would I go about calculating the daily continuously compounded return? Time: $ 0, 1, 2$ Index Values: $4000, 4086, 4114$ Any help would be ...
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1answer
75 views

Which returns to use for portfolio optimiaztion?

On the base of which returns do I have to derive optimal portfolio weights of an investment strategy? More specifically, do I have to use the excess returns or just the normal returns of the ...
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1answer
230 views

How to calculate standard deviation cone around expected returns?

I would like to evaluate the returns of an investment manager who has given me their return and volatility expectations for their fund. I would like to calculate both 1 and 2 standard deviations from ...
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1answer
160 views

Calculate New Portfolio Weights Given Today's Returns

I'm looking for a formula to recalculate my portfolio's weights at the end of time $T$, given a vector of the asset weights at $T$ and a vector of returns at $T$. For example: ...
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1answer
66 views

In search of nice (approx) function forms of the volatility of cumulative simple returns

Let's consider a period $t\in[0,T]$, and let the simple return over year $t$ ($1\le t\le T$) be $r_t$. Assume $r_t$ are iid normal. The cumualative simple return over the whole period $[0,T]$ is $$R_T=...
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2answers
179 views

Short position returns with negative NAV

I am using data on the opening, change and closing of short positions, but I am interested in when the profit/losses are made. Hence, I calculated daily the value of the short position by taking the ...
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1answer
52 views

How does inflation impact stock returns? Academic examples

For a literature survey in my university class, I have been asked the question "How does inflation impact stock returns?". After reading some informal articles (in periodicals/ the general internet), ...
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1answer
633 views

Empirical duration and convexity for bonds using linear regression

I have a given time series of bond yields from Quandl. From the time series, I have taken a sample to simulate a path of bond yields by Monte Carlo in Python. I have to do the following task: "...
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2answers
135 views

Price is Log-normal distributed, yet the return is non-normal

I have a price series. The natural logarithm of the price shows good normality. As shown in the standardized normal probability plot below: However, by viewing the standardized normal probability ...
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1answer
692 views

Getting monthly return using quantmod, if input ticker is a variable

I am new to package quantmod and quandl. I encountered a problem while I was trying to fetch period return data. Below is my ...
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198 views

Questions on continuously compounded return vs long term expected return

I have reading a paper from Oliver Grandville on long term expected return. I am trying to reconcile what I am reading in that paper vs what I see under "Application to Stock Market" in Kelly ...
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325 views

How do I estimate the volatiliy of my portfolio with an estimator that requires High, Low, Open, etc

I have obtained the daily returns of my portfolio $R^{port}_t$ using a certain strategy. Now I want to estimate the realized volatility $\sigma^{port}_t$ using the past 60 days. An obvious way to do ...
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684 views

Calculation of dividend yield from index returns

For a research project, I need to find or calculate dividend yield for all the index of major countries in the world (e.g: s&p500,DAX,CAC40 and so on), and I am struggling a bit with it. I cannot ...
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1answer
148 views

Return on investment in spreads

I have a hard time getting my head around this. Let's say you have a strategy that consists in buying one future spread, for instance CL Z7-Z8 (crude oil dec17 minus dec18). It's easy to calculate the ...
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1answer
393 views

What is the logic behind this backtesting code in R

I am new to R and I have found this simple backtesting code and can you explain me what is happening here. ...
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285 views

What P&L netting should one use when a strategy has trades in two different geographic locations?

I am familiar with the FIFO methodology of netting buys and sells to obtain a realized P&L and outstanding position. Suppose there's a strategy which runs in two different places A, and B and ...

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