[R-SIG-Finance] use log return or quotient return?

Patrick Burns patrick at burns-stat.com
Tue Nov 14 11:20:16 CET 2006

I think you have the wrong question.  The right
question is: Given what I'm doing, should I use
log returns or simple returns?

Since log returns are additive in time, it doesn't
stretch credibility too much to assume that the
distribution of log returns is Gaussian as the time
period gets large.  With shorter periods the distribution
will be long-tailed, but is often not far from symmetric. 
Hence for many modeling problems it makes sense to
use log returns.

Since simple returns are additive across assets,
it makes sense to use simple returns when going
from individual assets to a portfolio.  Simple returns
are also better understood by investors.

Writing R functions to switch between the two is an
easy exercise left to the reader.  Such functions should
be used as appropriate throughout a project.

Patrick Burns
patrick at burns-stat.com
+44 (0)20 8525 0696
(home of S Poetry and "A Guide for the Unwilling S User")

Michael wrote:

>Hi all,
>Does anybody know which is more commonly used in financial time series --
>log return or quotient return?
>Thanks a lot,
>	[[alternative HTML version deleted]]
>R-SIG-Finance at stat.math.ethz.ch mailing list

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