A Lack of Confidence Interval
Thu 15 February 2018
by
Steven E. Pav
For some years now I have been playing around with a certain problem
in portfolio statistics: suppose you observe \(n\) independent observations
of a \(p\) vector of returns, then form the Markowitz portfolio based on
those returns. What then is the distribution of what I call the 'signal to
noise ratio' of that Markowitz portfolio, defined as the true expected
return divided by the true volatility. That is, if \(\nu\) is the Markowitz
portfolio, built on a sample, its 'SNR' is \(\nu^{\top}\mu /
\sqrt{\nu^{\top}\Sigma \nu}\), where \(\mu\) is the population mean vector, and
\(\Sigma\) is the population covariance matrix.
This is an odd problem, somewhat unlike classical statistical inference because the
unknown quantity, the SNR, depends on population parameters, but also the
sample. It is random and unknown. What you learn in your basic statistics class is
inference on fixed unknowns. (Actually, I never really took a basic statistics
class, but I think that's right.)
Paulsen and Sohl made some progress on this problem in their 2016 paper on what
they call the
Sharpe Ratio Information Criterion.
They find a sample statistic which is unbiased for the portfolio SNR when
returns are (multivariate) Gaussian. In my mad scribblings on the backs of
envelopes and scrap paper, I have been trying to find the distribution of the SNR.
I have been looking for this love, as they say, in all the wrong places,
usually hoping for some clever transformation that will lead to a slick proof.
(I was taught from a young age to look for slick proofs.)
Having failed that mission, I pivoted to looking for confidence intervals for
the SNR (and maybe even prediction intervals on the out-of-sample Sharpe ratio
of the in-sample Markowitz portfolio). I realized that some of the work I had
done …
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Spy vs Spy vs Wald Wolfowitz.
Tue 05 September 2017
by
Steven E. Pav
I turned my kids on to the great Spy vs Spy cartoon from Mad Magazine.
This strip is pure gold for two young boys: Rube Goldberg plus
explosions with not much dialog (one child is still too young to read).
I became curious whether the one Spy had the upper hand, whether
Prohias worked to keep the score 'even', and so on.
Not finding any data out there, I collected the data to the best
of my ability from the Spy vs Spy Omnibus, which collects all
248 strips that appeared in Mad Magazine (plus two special issues).
I think there are more strips out there by Prohias that appeared
only in collected books, but have not collected them yet.
I entered the data into a google spreadsheet, then converted into
CSV, then into an R data package.
Now you can play along at home.
On to the simplest form of my question: did Prohias alternate between
Black and White Spy victories? or did he choose at random?
Up until 1968 it was common for two strips to appear in one issue
of Mad, with one victory per Spy. In some cases three strips
appeared per issue, with the Grey Spy appearing in the third;
the Black and White Spies always receive a comeuppance when she
appears, and so the balance of power was maintained.
After 1972, it seems that only a single strip appeared per issue,
and we can examine the time series of victories.
library(SPYvsSPY)
library(dplyr)
data(svs)
# show that there are multiple per strip
svs %>%
group_by(Mad_no,yrmo) %>%
summarize(nstrips=n(),
net_victories=sum(as.numeric(white_comeuppance) - as.numeric(black_comeuppance))) %>%
ungroup() %>%
select(yrmo,nstrips,net_victories) %>%
head(n=20) %>%
kable()
## `summarise()` has grouped output by 'Mad_no'. You can override using the `.groups` argument.
yrmo |
nstrips |
net_victories |
1961-01 … |
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Calendar plots in ggplot2.
Thu 18 May 2017
by
Steven E. Pav
I like the calendar 'heatmap' plots of commits you can see on
github user pages, and wanted to play around with some.
Of course, if I just wanted to make some plots, I could have just googled around, and then
followed this recipe,
or maybe used the rChartsCalmap package.
Instead I set out, as an exercise, to make my own using ggplot2.
For data, I am using the daily GHCND observations data for station USC00047880
, which is
located in the San Rafael, CA, Civic Center. I downloaded this data as part of a project
to join weather data to campground data (yes, it's been done before), directly from
the NOAA FTP site, then read the fixed width
file. I then processed the data, subselected to 2016 and beyond, and converted the units.
I am left with a dataframe of dates, the element name, and the value, which is a temperature
in Celsius. The first ten values I show here:
date |
element |
value |
2016-01-01 |
TMAX |
9.4 |
2016-01-01 |
TMIN |
0.0 |
2016-01-02 |
TMAX |
10.0 |
2016-01-02 |
TMIN |
3.9 |
2016-01-03 |
TMAX |
11.7 |
2016-01-03 |
TMIN |
6.7 |
2016-01-04 |
TMAX |
12.8 |
2016-01-04 |
TMIN |
6.7 |
2016-01-05 |
TMAX |
12.8 |
2016-01-05 |
TMIN |
8.3 |
Here is the code to produce the heatmap itself. I first use the date
field
to compute the x axis labels and locations: the dates are converted essentially
to 'Julian' days since January 4, 1970 (a Sunday), then divided by seven to
get a 'Julian' week number. The week number containing the tenth of the month is
then set as the location of the month name in the x axis labels. I add years to
the January labels.
I then compute the Julian week number and day number of the week. I create a variable
which alternates between …
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Elo and Draws.
Thu 04 May 2017
by
Steven E. Pav
I still had some nagging thoughts after my recent
examination of the distribution of Elo. In that
blog post, I recognized that a higher probability of a draw would lead
to tighter standard error around the true 'ability' of a player, as
estimated by an Elo ranking. Without any data, I punted on what that
probability should be. So I decided to look at some real data.
I started working in a risk role about a year ago. Compared to my
previous gig, there is a much greater focus on discrete event
modeling than on continuous outcomes. Logistic regression and
survival analysis are the tools of the trade. However,
financial risk modeling is more complex than the textbook
presentation of these methods. As is chess. A loan holder might
go bankrupt, stop paying, die, etc. Similarly, a chess player
might win, lose or draw.
There are two main ways of approaching multiple outcome discrete
models that leverage the simpler binary models: the competing hazards
view, and the sequential hazards view. Briefly, risk under
competing hazards would be like traversing the Fire Swamp: at any time,
the spurting flames, the lightning sand or the rodents of unusual
size might harm you. The risks all come at you at once.
An example of a sequential hazard is undergoing
surgery: you might die in surgery, and if you survive you might incur
an infection and die of complications; the risks present themselves
conditional on surviving other risks. (Both of these
views are mostly just conveniences, and real risks are never so
neatly defined.)
Returning to chess, I will consider sequential hazards.
Assume two players, and let the difference in true abilities between
them be denoted \(\Delta a\).
As with Elo, we want the difference in abilities is such that
the odds that the …
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