5 ms·

Can you clarify why "the target series should be log-normal returns" is important or provide a pointer for more information?

by jwiley 8y ago

jpeterson 8y ago
Investment markets operate on relative gain, not absolute gain. E.g.: if you invest in a stock and it gains $5, this would be a great return for a $1 stock but a poor one for a $1000 stock, so the absolute gain doesn't mean anything on its own. A 5% return always means that you've gained 5% on your investment.
- ak39 8y ago
  Would it be the same (valid) with percentage returns?
  - deleted 8y ago
    [deleted]
  - goodside 8y ago
    Less so. Log-normal returns are better because they have the property that a summation of log-normal returns over contiguous intervals is equal to the log-normal returns of the combined interval. In other words: Losing 5% and then gaining 5% doesn’t put you back at exactly 100%, and log-normal fixes that.
    - theothermkn 8y ago
      In the extreme, two successive trades, where the first gains 110% and the second loses 100%, “average” out to a 5% return. However, you don’t want to make that pair of trades.
    - ak39 8y ago
      Ah, that makes sense. Many thanks.
colinchartier 8y ago
I think their point is that predicting that "the stock will go up by 1$" or "the stock will go down by 1$" is worse than "the stock will go up by 0.05%" and "the stock will go down by 0.05%" because of this little paradox: 50$ increase from 50$ is 100% increase 50$ decrease from 100$ is 50% decrease e.g., if the model finds 50$ increase/decreases, that actually corresponds to very different wealth changes
jdmichal 8y ago
Well, just at a minimum... There's the fact that the majority of large gains and losses exist over single-day frames. That is, guessing "right" or "wrong" on movement means little when one slip on the wrong day will decimate your returns.
sseveran 8y ago
Here you go: https://financetrain.com/why-lognormal-distribution-is-used-to-describe-stock-prices/ https://financetrain.com/why-lognormal-distribution-is-used-...
- bigmit37 8y ago
  Thank you.
hendzen 8y ago
https://en.wikipedia.org/wiki/Stationary_process https://en.wikipedia.org/wiki/Stationary_process

Can you clarify why "the target series should be log-normal returns" is important or provide a pointer for more information?

by jwiley 8y ago

Can you clarify why "the target series should be log-normal returns" is important or provide a pointer for more information?

jpeterson 8y ago

Investment markets operate on relative gain, not absolute gain. E.g.: if you invest in a stock and it gains $5, this would be a great return for a $1 stock but a poor one for a $1000 stock, so the absolute gain doesn't mean anything on its own. A 5% return always means that you've gained 5% on your investment.

ak39 8y ago
Would it be the same (valid) with percentage returns?
- deleted 8y ago
  [deleted]
- goodside 8y ago
  Less so. Log-normal returns are better because they have the property that a summation of log-normal returns over contiguous intervals is equal to the log-normal returns of the combined interval. In other words: Losing 5% and then gaining 5% doesn’t put you back at exactly 100%, and log-normal fixes that.
  - theothermkn 8y ago
    In the extreme, two successive trades, where the first gains 110% and the second loses 100%, “average” out to a 5% return. However, you don’t want to make that pair of trades.
  - ak39 8y ago
    Ah, that makes sense. Many thanks.

colinchartier 8y ago

I think their point is that predicting that "the stock will go up by 1$" or "the stock will go down by 1$" is worse than "the stock will go up by 0.05%" and "the stock will go down by 0.05%" because of this little paradox: 50$ increase from 50$ is 100% increase 50$ decrease from 100$ is 50% decrease e.g., if the model finds 50$ increase/decreases, that actually corresponds to very different wealth changes

jdmichal 8y ago

Well, just at a minimum... There's the fact that the majority of large gains and losses exist over single-day frames. That is, guessing "right" or "wrong" on movement means little when one slip on the wrong day will decimate your returns.

sseveran 8y ago

Here you go: https://financetrain.com/why-lognormal-distribution-is-used-to-describe-stock-prices/ https://financetrain.com/why-lognormal-distribution-is-used-...

bigmit37 8y ago
Thank you.

hendzen 8y ago

https://en.wikipedia.org/wiki/Stationary_process https://en.wikipedia.org/wiki/Stationary_process