Logistics Regression & Industry Modeling

Similar documents
NPTEL Project. Econometric Modelling. Module 16: Qualitative Response Regression Modelling. Lecture 20: Qualitative Response Regression Modelling

Using survival models for profit and loss estimation. Dr Tony Bellotti Lecturer in Statistics Department of Mathematics Imperial College London

W H I T E P A P E R. Sabrient Multi-cap Insider/Analyst Quant-Weighted Index DAVID BROWN CHIEF MARKET STRATEGIST

Risk Reduction Potential

Indian Sovereign Yield Curve using Nelson-Siegel-Svensson Model

sociology SO5032 Quantitative Research Methods Brendan Halpin, Sociology, University of Limerick Spring 2018 SO5032 Quantitative Research Methods

Introduction to POL 217

Logistic Regression Analysis

AGENT BASED MODELING FOR PREDICTING PROPERTY AND CASUALTY UNDERWRITING CYCLES Presenter: Gao Niu Supervisor: Dr. Jay Vadiveloo, Ph.D.

Multinomial Logit Models for Variable Response Categories Ordered

Lecture 21: Logit Models for Multinomial Responses Continued

Hierarchical Generalized Linear Models. Measurement Incorporated Hierarchical Linear Models Workshop

List of tables List of boxes List of screenshots Preface to the third edition Acknowledgements

Yannan Hu 1, Frank J. van Lenthe 1, Rasmus Hoffmann 1,2, Karen van Hedel 1,3 and Johan P. Mackenbach 1*

Macroeconomic conditions and equity market volatility. Benn Eifert, PhD February 28, 2016

FOR 2018 GLOBAL MARKET OUTLOOK PRESS BRIEFING. PROVIDED TO DESIGNATED MEMBERS OF THE PRESS ONLY, NOT FOR FURTHER DISTRIBUTION.

Logit Models for Binary Data

Financial Applications Involving Exponential Functions

Early Retirement Incentives and Student Achievement. Maria D. Fitzpatrick and Michael F. Lovenheim. Online Appendix

Assessing the reliability of regression-based estimates of risk

Chapter 6 Simple Correlation and

Catherine De Vries, Spyros Kosmidis & Andreas Murr

Assessment on Credit Risk of Real Estate Based on Logistic Regression Model

Morningstar Direct SM. In-Depth Methodologies to Performance Attribution. Cindy Sin-Yi Tsai, CFA, CAIA, Senior Research Analyst <#>

Quantile Regression. By Luyang Fu, Ph. D., FCAS, State Auto Insurance Company Cheng-sheng Peter Wu, FCAS, ASA, MAAA, Deloitte Consulting

Superiority by a Margin Tests for the Ratio of Two Proportions

Independent Study Project

An alternative approach for the key assumption of life insurers and pension funds

Construction of daily hedonic housing indexes for apartments in Sweden

Chapter 5. Forecasting. Learning Objectives

Graduated from Glasgow University in 2009: BSc with Honours in Mathematics and Statistics.

Sabrient Leaders In Investment Research ENERSIS SA (ADR) Company Profile. Sabrient Analysis. Stock Fundamentals as of December 14, 2009

Practical example of an Economic Scenario Generator

Stocks. Participant Workbook. Your Name: Member SIPC PAGE 1 OF 17

List of figures. I General information 1

DESCRIPTIVE STATISTICS II. Sorana D. Bolboacă

STA 4504/5503 Sample questions for exam True-False questions.

Calculating the Probabilities of Member Engagement

Lecture 10: Alternatives to OLS with limited dependent variables, part 1. PEA vs APE Logit/Probit

Journal Of Financial And Strategic Decisions Volume 10 Number 2 Summer 1997 AN ANALYSIS OF VALUE LINE S ABILITY TO FORECAST LONG-RUN RETURNS

A Comparative Study of Various Forecasting Techniques in Predicting. BSE S&P Sensex

Survey of Math: Chapter 21: Consumer Finance Savings (Lecture 1) Page 1

Duangporn Jearkpaporn, Connie M. Borror Douglas C. Montgomery and George C. Runger Arizona State University Tempe, AZ

Math of Finance Exponential & Power Functions

Efficiency and Regulation of Electricity and Gas Distribution Companies

WELCOME TO THE FOURTH QUARTER

Introductory Econometrics for Finance

Introducing the JPMorgan Cross Sectional Volatility Model & Report

Investors Have Allocated Less to Value

BALANCED FUND. 25 Years of Dynamic Asset Allocation. 4Q17 Asset Allocation. Overall Morningstar Rating TM

FE670 Algorithmic Trading Strategies. Stevens Institute of Technology

JPMorgan Fleming Asset Management

PALM TRAN, INC./ATU LOCAL 1577 PENSION FUND INVESTMENT PERFORMANCE PERIOD ENDING MARCH 31, 2011

ONLINE APPENDIX (NOT FOR PUBLICATION) Appendix A: Appendix Figures and Tables

Credit Score Basics, Part 3: Achieving the Same Risk Interpretation from Different Models with Different Ranges

JUPITER POLICE OFFICER'S RETIREMENT FUND INVESTMENT PERFORMANCE PERIOD ENDING SEPTEMBER 30, 2008

Openness and Inflation

Model Paper Statistics Objective. Paper Code Time Allowed: 20 minutes

Substantive insights from an income-based intervention to reduce poverty

Some Characteristics of Data

9/17/2015. Basic Statistics for the Healthcare Professional. Relax.it won t be that bad! Purpose of Statistic. Objectives

Non linearity issues in PD modelling. Amrita Juhi Lucas Klinkers

Credit Risk. June 2014

STATISTICS 110/201, FALL 2017 Homework #5 Solutions Assigned Mon, November 6, Due Wed, November 15

Novel Changes in Bundled Payments Cleveland Clinic Experience. Joseph Cacchione, M.D. Chairman, HVI Strategic Operations

Session 5. Predictive Modeling in Life Insurance

Contents Part I Descriptive Statistics 1 Introduction and Framework Population, Sample, and Observations Variables Quali

Diploma in Business Administration Part 2. Quantitative Methods. Examiner s Suggested Answers

Sabrient Leaders In Investment Research HEALTH CARE PROPERTY INVESTORS. Company Profile. Sabrient Analysis. Stock Fundamentals as of January 19, 2010

Tests for the Odds Ratio in a Matched Case-Control Design with a Binary X


KAMAKURA RISK INFORMATION SERVICES

MBA 7020 Sample Final Exam

Econometric Computing Issues with Logit Regression Models: The Case of Observation-Specific and Group Dummy Variables

How to Trade Options Using VantagePoint and Trade Management

Ordinal Multinomial Logistic Regression. Thom M. Suhy Southern Methodist University May14th, 2013

Categorical Outcomes. Statistical Modelling in Stata: Categorical Outcomes. R by C Table: Example. Nominal Outcomes. Mark Lunt.

To be two or not be two, that is a LOGISTIC question

PASS Sample Size Software

West Coast Stata Users Group Meeting, October 25, 2007

CHAPTER 11 Regression with a Binary Dependent Variable. Kazu Matsuda IBEC PHBU 430 Econometrics

An Examination of the Predictive Abilities of Economic Derivative Markets. Jennifer McCabe

OUT OF THE WOODS? COMMENTARY STRONG FUNDAMENTALS KEY TAKEAWAYS LPL RESEARCH WEEKLY MARKET. February

Optimal Interest Rate for a Borrower with Estimated Default and Prepayment Risk

The Benefits of Dynamic Factor Weights

Additional series available. Morningstar TM Rating. Funds in category. Equity style Market cap %

Value Averaging Investing. The Strategy for Enhancing Investment Returns

University of Zürich, Switzerland

The Mode: An Example. The Mode: An Example. Measure of Central Tendency: The Mode. Measure of Central Tendency: The Median

THE PENNSYLVANIA STATE UNIVERSITY SCHREYER HONORS COLLEGE DEPARTMENT OF FINANCE

Name: 1. Use the data from the following table to answer the questions that follow: (10 points)

Mortality Rates Estimation Using Whittaker-Henderson Graduation Technique

Correcting for Survival Effects in Cross Section Wage Equations Using NBA Data

Session 5. A brief introduction to Predictive Modeling

The University of Chicago, Booth School of Business Business 41202, Spring Quarter 2017, Mr. Ruey S. Tsay. Solutions to Final Exam

INDIAN INSTITUTE OF SCIENCE STOCHASTIC HYDROLOGY. Lecture -26 Course Instructor : Prof. P. P. MUJUMDAR Department of Civil Engg., IISc.

Contents. An Overview of Statistical Applications CHAPTER 1. Contents (ix) Preface... (vii)

DIVIDEND GROWTH STRATEGY

SUMMARY STATISTICS EXAMPLES AND ACTIVITIES

REGIONAL WORKSHOP ON TRAFFIC FORECASTING AND ECONOMIC PLANNING

Transcription:

Logistics Regression & Industry Modeling Framing Financial Problems as Probabilities Russ Koesterich, CFA Chief North American Strategist

Logistics Regression & Probability So far as the laws of mathematics refer to reality, they are not certain. And so far as they are certain, they do not refer to reality. -Albert Einstein

Key Topics 1. Introduction to Logistics Regression 2. Methodology 3. Rationales for its use 4. Applications in Sector/Industry Models

Introduction Methodology for modeling a dichotomous event Output suited to less quantitative professionals, who can intuitively appreciate a probability Well suited for Industry, Sector, Style Modeling Can also be adopted to absolute return strategies by looking at positive or negative absolute returns

Methodology What is Logistics Regression? A mathematical modeling approach that can be used to describe the relationship of several X s to a dichotomous dependent variable - Dr. David Kleinbaum, Logistics Regression. Uses maximum likelihood algorithm to estimate regression coefficients Technique is common in biostatistics, particularly in the field of epidemiology. Easily adopted to dichotomous events: Outperform/Underperform, Growth/Value, Large Cap/Small cap, et.

Logistic Model 1 0.5 0 Logit Function F(z)=1/(1+e -z ) Logistics function uses logit link to describe a probability by using an S- shaped function: F(z) = 1/(1+ e -z ) Where z is the traditional regression equation: Z=ά +β 1 X 1 + β 2 X 2 +.β k X k

Logistics Formula Model Describes Expected Value of Y (I.e. E(Y) in terms of the formula: E(Y) = 1 1+ exp[ -(β 0 + Σβ j X j )]

Maximum Likelihood (ML) Estimation If dependent variable is assumed to be normal, ML estimation gives same estimate as OLS Because Logistics Regression is a non-linear model, ML estimation is preferred method ML estimation requires no restrictions on the characteristics of the independent variables Variables can be nominal, ordinal, and/or interval

Features & Benefits of Logistics Regression Different perspective Look at financial problems as a set of possible outcomes, what is the likelihood of the different outcomes Probability output provides an intuitive framework for evaluating future scenarios Can use to forecast probability of multiple events (nominal or ordinal logistics regression) Odds Ratio

Odds Ratio Calculation Odds = P/(1-P) Odds Ratio = Odds X 1 /Odds X 2 or OR(1,0) = P(X 1 )/(1-P(X 1 )) P(X 0 )/(1-P(X 0 )) Odds Ratio also equals=> exponentiate product of the coefficient and change in the variable. Odds Ratio = e βi(xi1-xi2)

Example Odds Ratio 1. Changes in rates impact Retail Stocks. Specifically, the 6 month rate-of-change in the 10 yr yield impacts the probability of outperformance. 2. Coefficient for the relationship is 2.451. 3. Compare likelihood of outperformance when rates are down 20% in 6 months (5% to 4%) vs. when rates are up 20% (5% to 6%).

Example Odds Ratio (continued) Calculation: If all other factors held constant, odds ratio = e (-2.451*(-0.2 0.2)) = e (-2.451*(-0.4)) = 2.66 Conclusion: Retail stocks are 2.6x more likely to outperform when interest rates have dropped 20% over the past 6 months versus periods following a 20% rise in rates.

Example Odds Ratio Dichotomous Variable 1. Seasonality Impacts Consumer Discretionary Stocks. Sector More likely to Outperform Q1 2. Code Seasonality as Dummy Variable, 1 = Q1, 0= all other quarters 3. Coefficient =.6606 4. Odds Ratio = e 0.6606(1-0) = e 0.6606 = 1.51 Conclusion: Consumer Discretionary Sector 1.5x more likely to beat market in Q1 than in all other quarters.

Industry Sector Model Objectives Provide framework for intermediate (1-6 month) sector and group recommendations Isolate those relevant factors which demonstrate a consistent and leading relationship to a sector s future relative performance Combine factors in a systematic and controlled interaction framework Deliver output which indicates which sectors to overweight/underweight

3 Examples of Group/Sector Specific Factors Healthcare Sector: Sector Specific Input: Medicare Payments Rule: Are quarterly changes above/below recent median? Impact: If above median, group 2.7x more likely to outperform Utilities Sector: Sector Specific Input: Electric Power Use Rule: Are annual changes high(top quartile) or low (bottom quartile)? Impact: If changes high, group 2.4x more likely to outperform. Retail Industry: Industry Specific Input: CPI Apparel Rule: Is apparel inflation above its recent median? Impact: If apparel inflation above median, group is 2x more likely to outperform.

Model Example Communications Equipment Industry Factors: (1)New Investment in Fixed Technology (2)Changes in Tech. Capacity Utilization (3)ISM New Orders Index (4)Risk Appetite (Measured by the VIX Index)

Sample Model & Returns In Sample Backtests Probability Score Average Median Count Win 1st Quartile 3rd Quartile 0.00% 50.00% -1.71% -1.43% 56 42.86% -6.37% 4.72% 50.00% 100.00% 1.69% 1.56% 114 64.04% -2.52% 5.44% Out Sample Backtests Probability Score Average Median Count Win 1st Quartile 3rd Quartile 0.00% 50.00% -3.54% -2.06% 18 38.89% -9.08% 2.09% 50.00% 100.00% 1.01% 1.55% 24 70.83% -4.71% 5.58%

Model Probability & Returns Communication Equipment Model 1 Month Forward Rel. Rt. Model Probability Outperformance 1 Month Rel. Rt. 0.3 0.2 0.1 0-0.1-0.2-0.3-0.4 Mar-90 Nov-91 Jul-93 Mar-95 Nov-96 Jul-98 Mar-00 Nov-01 Jul-03 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Probability Outperformance

Conclusions Logistics Regression provides a different perspective to many financial problems The methodology provides an intuitive output An added benefit of the methodology is the Odds Ratio, which can be easily extracted from the model Finally, it is well suited towards Industry and Relative Return Analysis