[R-sig-finance] price break down

[davidr at rhotrading.com]

All bond prices are exact in binary arithmetic, so no round-off.

(I may have missed part of this conversation while on vacation.)

David L. Reiner
 

> -----Original Message-----
> From: r-sig-finance-bounces at stat.math.ethz.ch [mailto:r-sig-finance-
> bounces at stat.math.ethz.ch] On Behalf Of Spencer Graves
> Sent: Monday, March 20, 2006 8:12 PM
> To: Fred J.
> Cc: r-sig-finance at stat.math.ethz.ch
> Subject: Re: [R-sig-finance] price break down
> 
> 	  Nearly all computations in R are to double precision, and I
would
> not
> worry about round-off error in this case.
> 
> 	  Far more important is an issue you have not mentioned:  What
do
> you
> think about doing essentially all your computations on log price and
log
> returns?  I recommend this for two reasons:  First, log prices and log
> returns tend more nearly normally distributed than the raw data and
> unlogged returns.  Second, the logarithms tend to be more tractible
> mathematically.  For example, extrapolation from a model fit to prices
> in dollars could give you negative prices, i.e., you would have to pay
> someone to take your bonds.  By contrast, negative log prices just
means
> that the price is less than one dollar (or one Swiss Franc or whatever
> currency you are using).  If you honestly can be required to pay
someone
> to take your bonds, then you don't want logarithms;  otherwise, I
think
>   you do.
> 
> 	  hope this helps.
> 	  spencer graves
> 
> Fred J. wrote:
> 
> >   Hi
> >
> >   Doing calculations on time series data "US bonds" where the
> price is presented say 11328 to mean 113 28/32, it seams to me
> that converting the rational would be 0.875 and the round-off
> error would be expected to cause problems in doing calculations
> on such numbers, how one could avoid or minimize such a problem?
> >   or handle bond-kind-of-price in general?  Thanks
> >
> >
> >
> >
> > ---------------------------------
> >
> >
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> >
> >
> >
> >
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