model

Modeling how cats drink

November 11, 2010

I thought this was fascinating -- scientists have modeled how cats drink. Naturally, once you have a model, you want to see how well if fits the data. For example, is there an optimal lapping speed? After calculation of things like the Froude number and the aspect ratio, they were able to figure out how [...]

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More on models

October 19, 2010

Justin Fox asks, "Why didn't people in finance pay attention to Benoit Mandelbrot?" -- and it's a great question. His conclusion: I think it’s mainly that he didn’t provide them a handy alternative to Black-Scholes. I can’t pretend to fully understand the practical implications of his fractal view of markets, but it does seem more [...]

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The rise of VaR

October 1, 2009

Simon Johnson and James Kwak take a look at how VaR got to be so popular in the first place. They make the insightful observation that a bad (or at least an incomplete) model can gain acceptance not only because of its simplicity but, oddly, because of its output as well. Indeed, VaR succeeded not [...]

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Search forecasts

September 8, 2009

Google Insights recently rolled out a new feature: 12 month search forecasts. The forecast comes from a relatively simple decomposition of the search volume into trend, seasonal and residual components. The model's out-of-sample performance is tested on the most recent 12 month period; if that prediction proves accurate, then the model is accepted. Here's what [...]

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Modelling interactions

August 18, 2009

Andrew Gelman's latest post highlights the importance of interactions. He includes this breakdown of where people fall depending on political party, ideology, and income: Consider the income dimension. Among liberals, the income curve is flat no matter whether the person is a Democrat, Independent or Republican. For conservatives, however, income has a large effect - [...]

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Deconstructing the Gaussian copula, part III

August 11, 2009

The intuition behind copula models: dependence, correlation, single factors and more.

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Photo finish: the Netflix prize

July 28, 2009

A month ago, the million dollar Netflix prize was finally won by a coalition of leading teams called Bellkor's Pragmatic Chaos, who blended their respective methods into a super-algorithm that finally crossed the 10% improvement barrier. ...or was it? The 10% mark sent the competition into a final, 30-day countdown, during which time other teams could [...]

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Deconstructing the Gaussian copula, part II

July 9, 2009

A math-free introduction to CDO pricing.

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Interviewing Myron Scholes

May 16, 2009

Speaking of LTCM (and of this Sunday's Times Magazine, for that matter), here's an interview that's going to run with Myron Scholes, who comes off like a bad comedian. The questions are poor and the answers arguably worse. Let's take a look, shall we? The second question: "You're known as the intellectual father of the [...]

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Projections of future losses may appear closer than they are

May 7, 2009

AK pointed me toward this piece from The New Yorker, "Stress Test Results: In Line With Other Estimates," which I excerpt here in its entirety. I've bolded the last sentence: From the moment the Treasury Department announced its plan to stress-test the country’s nineteen biggest “bank holding companies,” the process was dismissed as a whitewash. [...]

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Touché.

April 27, 2009

I have been doing some research on text analysis, in particular on extracting sentiment in the absence of context (a la Twitter). Among all the theory, I came across the following joke which I think really captures the complexity of any natural language processing (not that it prevents us from trying): A linguistics professor was [...]

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How (not) to design a stress test

April 25, 2009

Of course the big news of Friday afternoon was the preliminary release of the metrics used in the bank stress tests. Unfortunately it didn't turn out to be much news at all; few hard figures were revealed and those that were came largely within expectations. The NYTimes published an excellent copy of the document right [...]

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The Modeling Problem

April 16, 2009

Mike at Rortybomb has a post on the pros and cons of MBAs. Among his cons is the following: They just wrote a post about MBA students being owned by their models. The general idea underneath this is that these models are too complicated to understand, and taught to be something that is true rather [...]

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