making sense of 100's of funds
Patrick, That is an interesting paper, in this case I was asking myself the question, "if I know that today's Melbourne prices are correlated to yesterdays NY prices, is there a possibility of taking advantage of that?" That is, not so much from putting a portfolio together, but daily investment decisions. cheers
Patrick Burns wrote:
paul sorenson wrote:
Probably not unsurprisingly, the correlation between the SP200 and the global share fund daily returns goes up (from 0.16 to 0.42) when I insert a 1 day lag.
Careful. There are asynchrony issues with global data, which definitely affect the correlation (it is too low). Presumably the global return series has asynchrony issues all by itself. The working paper for Burns, Engle and Mezrich (1998) is available at http://www.econ.ucsd.edu/papers/dp97.html That paper talks about the effects of asynchrony and proposes a method of backing out data without asynchrony. Our investigation suggested that using weekly data is adequate for avoiding asynchrony effects.
http://www.metrak.com/tmp/exch10.png has plots produced by ccf(). Brian - if I want to look at returns over a different period using PerformanceAnalytics when the base data is daily, is the normal strategy just to undersample prices before calling CalculateReturns? I am guessing that the correlation of the SP200 and global share fund would increase when looking at a longer time period. I also want to compare it with some other data which comes out monthly. cheers BTW sorry if I am boring you guys with what must be very basic stuff - just tell me.
Asynchrony is neither basic (i.e., well-studied) nor very well appreciated. I don't vote this message boring. Patrick Burns patrick at burns-stat.com +44 (0)20 8525 0696 http://www.burns-stat.com (home of S Poetry and "A Guide for the Unwilling S User")
Brian G. Peterson wrote:
paul sorenson wrote:
I ran a pairs plot on the daily fund returns as well as calculating the correlation coefficient (Pearson). The pairs plot is reproduced at http://www.metrak.com/tmp/exch09.png and unless I am missing something, some of these "look" significant whereas some don't.
The pairs plot will certainly show you funds that closely track the index. A quick check of cor() (or the Pearson correlation coefficient) and CAPM.alpha() will do the same. A pairs plot (and to a lesser extent correlation) won't show you anything about systematic out-performance or under-performance, while alpha is a good indicator if the benchmark you choose is indicative of the investment universe of the fund. Another good indicator is Sortino's Upside Potential Ratio, especially if you choose the benchmark index standard deviation as your MAR. CAPM alpha will not be a good indicator if you choose an index that is different from the investment style of the fund. For example, using a SP200 index with a fixed income fund wouldn't make any sense. Cheers, -Brian
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