Tuesday, April 1, 2008
Bayesian Statistics + factor models = Alpha Mojo
Bayesian statistics can be used to combine qualitative investment ideas with quantitative financial models in a objective manner. Chincarini & Kim refer to Bayesian statics, along with the use of leverage, and market neutral exposure, as a source of "Alpha Mojo." We will talk about Bayesian statistics in more detail later, after we have finished building our factor model, but I thought readers might enjoy the following links to articles on Bayesian statistics. Both are written by Eliezer Yudkowsky, who is a Research Fellow at The Singularity Institute for Artificial Intelligence. Yudkowsky also wrote Creating Friendly AI 1.0, which people with an interest in artificial intelligence and The Singularity will find interesting.
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Hi, can you explain how you use bayes factors in linear factor models to model hedge fund returns?
I've tried extracting alpha through factor models, but not to much success. for equity market nuetral and other non directional funds, my R^2 was quite low. The highest R^2 i achieved as 71% for Global Long SHort. I used the standard Fama French factors of excess ret., SMB, HML
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