[R-sig-finance] Fwd: negative weights

[BBands]

On 4/28/06, Dirk Eddelbuettel <edd at debian.org> wrote:
>
> Hm, you didn't mention forecasting. I am not even sure where weights would
> enter there...

On 4/29/06, Patrick Burns <patrick at burns-stat.com> wrote:

> I'm not sure what you are aiming at.  I would think
> that a negative weight would mean that the bigger
> the residual for that observation, the better.

I build these models to forecast future returns, but maybe I am
barking up the wrong tree on this one. Let's use a very widely
accepted meme to see:

Suppose you buy into the Columbine thesis that mean reversion prevails
in the short term while momentum prevails in the long term. Let's look
at the simplest model that can capture that thesis, a
two-period-return model where a is the long-term return and b is the
short-term return. In order for this model to work you would need
weights of something like 1 and -1 for a and b respectively. Now
expand the model to a reasonable number of returns and a larger number
of securities and a regression using a shaped set of weights including
negative weights starts to look like an attractive idea. Of course I
can preprocess the data and then feed it to the model...

Any ideas?

    jab
--
John Bollinger, CFA, CMT
www.BollingerBands.com

If you advance far enough, you arrive at the beginning.