Live Correlation plot, shiny improvement.

Open CPU is a great project. Few months back, I wrote a function for plotting a moving window of the market average correlation. Jeroen C.L. Ooms was nice enough to upload it to their server. Something is now changed. Quotes now return as a character class, as oppose to numeric. This messes up the function and the plot does not renders. I don’t wish to disturb Jeroen C.L. Ooms again with the correction for the code (despite his kind replies in the past). This problem creates the opportunity to look at the glistening “Shiny” package. I used it to (quickly..) build an app for the plot. You can now view a live correlation plot with the moving window of your choice. Live, as the app requests current market data. The width of the window for correlation calculation is given as an input parameter.

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Elegant backup for your smart phone contacts

Few days ago I dropped my iPhone and cracked it. Though the iPhone still works, I decided it will be good to have a backup for my contact on my desktop. Fancy backup can be achieved in the following two step procedure: first synching your contacts information with facebook, and second, sending yourself an excel file with full details of your mobile contacts, phone number, date of birth, home page, work address and other details extracted from their facebook page. The process takes only few minutes and is free.

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On Volatility Proxy

Volatility is unobserved. Hence we need to use observed quantity as a proxy. Every once in a while I still see people using squared daily return as a proxy. However, there is ample evidence that it is a bad one. Bad in a sense that it is noisy, which means that although on average it is a good estimate, on any individual day the estimate can be very far from the actual unobserved volatility. Here is a figure of the alleged standard deviation in the form of (square root of the) squared daily return for the recent year:
Proxy for unobserved volatility using squared returns You can see that in many days, this noisy estimate suggests that the volatility was around 2% and more. To me, it does not make too much sense. The series is the S&P 500, so a move of 3% is a BIG one. You can also see how “jumpy” the series is. The figure illustrates why we should avoid using this estimate.

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Forecasting the Misery Index, follow-up

Five months ago I generated forecasts for the Eurozone Misery index. I used the built-in “FitAR” package in R. Using different models differing in their memory length (how many lags were considered for each model) 24 months ahead forecasts were generated. Might be interesting to see how accurate are the forecasts. The previous post is updated and few bugs corrected in the code. The updated data is public and can be found here. It is the sum of inflation rate and unemployment rate in the Euro-zone area.

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Volatility forecast evaluation in R

In portfolio management, risk management and derivative pricing, volatility plays an important role. So important in fact that you can find more volatility models than you can handle (Wikipedia link). What follows is to check how well each model performs, in and out of sample. Here are three simple things you can do:

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Intraday volatility measures

In the last few decades there has been tremendous progress in the realm of volatility estimation. A major step is the additional use of intraday price path. It has been shown that estimates which consider intraday information are more accurate. Which is to say they converge faster to the real unobserved value of the true volatility.

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Bootstrapping time series – R code

Bootstrapping in its general form (“ordinary” bootstrap) relies on IID observations which staples the theory backing it. However, time series are a different animal and bootstrapping time series requires somewhat different procedure to preserve dependency structure.

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Better summary function in R

The summary function in R returns:

For the univariate case I wrote what I consider to be a better summary function which returns:

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Random books

It seems like a very long while since my bachelor. Checking my bookshelf the other day I was thinking to flag some of those books which helped or inspired me along the way. Here they are in no particular order.

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Forecasting the Eurozone Misery index

Is Miss Stagflation coming to visit?
The Misery index is the sum of inflation and unemployment rate. We would like them both to stay naturally low, and we are miserable when they are not. The index is currently floating in it’s record scratching levels. In this post I demonstrate the use of the nice FitAR package in R to fit an AR model and see what we can expect accordingly. Inflation and unemployment numbers concerning the Eurozone (17 countries) can be found here.
Have a look at the index over time:

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Stock market Kurtosis over time

In the last decade we have observed an increase in computational power, information availability, speed of execution and stock market competition in general. One might think that, as a result, we are prone to larger shocks that occur faster than what was common in the past. I crunched some numbers and was surprised to see that this is not the case.

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