A statistics course
committed to honest data analysis,
focused on mastery of best-practice models,
and obsessed with the dynamics of financial markets
Course Blog
Anticipating Day One
Posted 28 August 2008
There will be three main objectives, beyond going over the logistics of the class. First, we'll go over the procedural details regarding homework, teams, and the final projects.
Second, there is at less a little nibbling at our first model --- AR(1), the simplest auto-regressive model and the simplest alternative to pure random noise. Over the course of the term, we'll develop considerable expertise with this model, but the main purpose the fist exposure is to help you calibrate the level of mathematics we will be using --- not too high, but not too low
Finally, we'll have a real-time introduction to S-plus which is our main software tool. Before next Monday you are expected to have installed S-Plus Finmetrics on you PC and to have given it a test drive. You also need to complete the student questionnaire and bring it to class. For information on how to install S-Plus and Finmetrics, please see the write-up in the CodeBox (but anticipate up-dates!)
Note: There are many S-Plus tutorials on the web. My advice is not to bother with them for the moment. We'll develop the tools that we need as we need them, and there are many S-plus tools that we will never need. Moreover, we will work almost exclusively from the command line, and many of the web tutorials are for lower-level courses that rely on the graphical interface which would only stir in confusion.
Still Shopping? What You Need to Know
If you are still course shopping, I may be able to save you some time.
First, everyone in the course absolutely must have access to a Windows PC on which they can install software. The reason for this is that we will be using the software S-Plus with Finmetrics, and this software does not run on Macs or Unix. Also, the software cannot be placed on public machines.
If you are thinking about maybe scraping along without proprietary access to a windows box, I strongly encourage you not to try. From experience, I know this requirement is a deal killer.
Second, I should underscore that this is a course about financial time series. There are lots of applications of time series, and you might think that this course could help you with engineering or medicine or some other worthwhile activity. Unfortunately, that is not the way this course works. Most of our techniques and almost all of our efforts focus on just what is special about financial time series.
Certainly, from time to time, I will mention some of the ways that time series are used outside of financial contexts, but those will just be small parenthetical remarks. The course is about the models and empirical realities of asset returns. If asset returns are not deeply and absolutely interesting to you, then you will miss out on the real fun of the class. The class would be like dancing without liking the music --- possible, but not a good use of one's time.
More Details about the Academic Prerequisites?
We will be writing some programs and dealing with some serious software tools, so it helps if you like such work. We won't be doing a ton of mathematics, but if you can't remember calculus, this is not the course for you. You will also have to have some acquaintance with linear algebra (matrix and vector concepts, matrix multiplication, matrix inversion, notion of matrix rank, etc).
From the beginning we will be using expectations, variances, co-variances, probability distributions, confidence intervals, and multiple regression, so you should have had some solid exposure to all of these. Still, I do not expect that all these tools have been completely mastered. Throughout the course a serious effort will be given to deepening your understanding of the fundamentals. This is a never ending process.
Just how much mathematics, statistics, and "computer sense" you need --- well, it's almost impossible to say.
Strength in one place can make up for weakness in another. In the end, what maters most is whether you look forward to trying your hand at discovering whatever you can about the ways that asset prices evolve over time.
Almost without exception, personal motivation, honest curiosity, and simple commitment will rule the day. These work best when combined with an informed interest in financial markets and a solid self-confidence in your own abilities and knowledge.
What About that First Day?
It's not one you should skip. On of the main tasks will be to sketch out a "mind map" that will provide the big picture for the whole course. We'll also be handling a lot of logistics, such as text requirements and software access. We'll also begin work with S-Plus, our main software tool.
About the Text --- Zivot and Wang Again?
In the Fall of 2008 we will again use the text by Zivot and Wang. I came to this decision, only after much soul searching. We are really only going to use about a fourth of its many pages, but there is no (legal) way that I could think of getting you just those pages that we need. It is not required that you have copy of the book, but life will definitely be easier for those who have comfortable access to a copy. Perhaps getting on copy per team would be a good compromise.
I wish that the book were (1) smaller (2) more focused on what we use (3) more "opinionated" about what works --- or doesn't (4) more generous with coaching about S-Plus (5) more sincere in its engagement of real financial issues. It is sadly a "computer manual" and a bit of a cookbook.
Still, it is a beginning, and one needs a place to start. Eventually, I will write my own text for 434, but there is no chance that a workable version will be available any time soon, even 2010 is a long shot. So, we will have to make do.
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