Sorry I meant to address the email to Garrett :)

On Tue, Nov 29, 2011 at 2:41 PM, Samit Jain <sjain@caa.columbia.edu> wrote:

> Hi Paul,
> Interesting findings. I was wondering if you tested the different ratios
> (OLS, btcdHedge and TLS) on a new data set to see which performs better?
> Something we could do is split the data since 2011-01-01 in two, train the
> parameters using the three approaches on the first, and test them for daily
> returns on second set. We could then look at average returns and variance.
>
> cheers,
> Samit
>
>
> On Tue, Nov 29, 2011 at 2:20 PM, G See <gsee000@gmail.com> wrote:
>
>> Paul,
>>
>> Thank you very much for sending this; I've seen the lightning talk
>> slides, and spent some time playing with it.  I do have a couple
>> observations.
>>
>> First, often it seems like if I use the inverse of your code I get better
>> results.
>>
>> i.e. I find that r$loadings[1,1] / r$loadings[2,1] is closer to what I
>> get using other hedge ratio calculation methods.
>>
>> I attached a hedge ratio calculating function called "btcdHedge" to use
>> as a comparison.  I took the code for this function from
>> http://quantivity.wordpress.com/2011/10/02/proxy-cross-hedging/
>>
>> If I use btcdHedge to calculate the ratio between SPY and DIA since
>> 2011-01-01, it tells me to sell 1.070554 DIA for each share of SPY that I
>> am long.
>>
>> That is very close to the 1.070894 I would get if I used  OLS with a zero
>> intercept
>>
>> If I use OLS with a floating intercept, I get 1.206745.
>>
>> If I use your TLS code, I get 0.777546
>>
>> So, your TLS code is the only one that gives a ratio of less than 1.
>>
>> However, if I use the inverse of your code I get something close to OLS
>> with floating intercept
>> r$loadings[1,1] / r$loadings[2,1]
>> [1] 1.286098
>>
>>
>> Second,
>> You say
>> "Forcing a zero intercept requires an additional step: recentering the
>> data around
>> their means prior to the PCA."
>>
>> However, I get the same values regardless of whether I center around the
>> means.
>>
>> Thanks,
>> Garrett
>>
>> On Tue, Nov 29, 2011 at 12:08 PM, Paul Teetor <paulteetor@yahoo.com>wrote:
>>
>>> R-SIG-Finance community:
>>>
>>> I recently posted a short paper entitled Better Hedge Ratios for Spread
>>> Trading:
>>>
>>>    http://www.quanttrader.info/public/betterHedgeRatios.pdf
>>>
>>> The topic is pretty arcane but important to spread traders. A surprizing
>>> number of textbooks and practitioners simply use ordinary least squares
>>> (OLS) to calculate their hedge ratios, but OLS can give misleading
>>> results.
>>> The paper shows how to use total least squares (TLS) to obtain a better
>>> balanced spread. The needed R code is simple and included in the paper.
>>>
>>> The paper is based on a lightning talk I gave at the R/Finance Conference
>>> back in April.
>>>
>>> I welcome all comments. I can't guarantee I will quickly incorporate your
>>> feedback into the paper, unfortunately. Heck, it took me seven months
>>> just
>>> to get out this first version.
>>>
>>> Paul Teetor
>>> Elgin, IL   USA
>>> http://www.linkedin.com/in/paulteetor
>>>
>>> "For quant traders, there are no bad days in the market. It's just more
>>> data."
>>>
>>>
>>>        [[alternative HTML version deleted]]
>>>
>>> _______________________________________________
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>>> -- Also note that this is not the r-help list where general R questions
>>> should go.
>>>
>>
>>
>> _______________________________________________
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>>
>
>

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