run_covar: Calculate the trailing covariances of two streaming _time...

In algoquant/HighFreq: High Frequency Time Series Management

Calculate the trailing covariances of two streaming time series of returns using an online recursive formula.

Description

Calculate the trailing covariances of two streaming time series of returns using an online recursive formula.

Usage

run_covar(tseries, lambda)

Arguments

tseries	A time series or a matrix with two columns of returns data.
lambda	A decay factor which multiplies past estimates.

Details

The function run_covar() calculates the trailing covariances of two streaming time series of returns, by recursively weighting the past covariance estimates {cov}_{t-1}, with the products of their returns minus their means, using the decay factor \lambda:

\bar{x}_t = \lambda \bar{x}_{t-1} + (1-\lambda) x_t

\bar{y}_t = \lambda \bar{y}_{t-1} + (1-\lambda) y_t

\sigma^2_{x t} = \lambda \sigma^2_{x t-1} + (1-\lambda) (x_t - \bar{x}_t)^2

\sigma^2_{y t} = \lambda \sigma^2_{y t-1} + (1-\lambda) (y_t - \bar{y}_t)^2

{cov}_t = \lambda {cov}_{t-1} + (1-\lambda) (x_t - \bar{x}_t) (y_t - \bar{y}_t)

Where {cov}_t is the trailing covariance estimate at time t, \sigma^2_{x t}, \sigma^2_{y t}, \bar{x}_t and \bar{x}_t are the trailing variances and means of the returns, and x_t and y_t are the two streaming returns data.

The above online recursive formulas are convenient for processing live streaming data because they don't require maintaining a buffer of past data. The formulas are equivalent to a convolution with exponentially decaying weights, but they're much faster to calculate. Using exponentially decaying weights is more natural than using a sliding look-back interval, because it gradually "forgets" about the past data.

The value of the decay factor \lambda must be in the range between 0 and 1. If \lambda is close to 1 then the decay is weak and past values have a greater weight, and the trailing covariance values have a stronger dependence on past data. This is equivalent to a long look-back interval. If \lambda is much less than 1 then the decay is strong and past values have a smaller weight, and the trailing covariance values have a weaker dependence on past data. This is equivalent to a short look-back interval.

The function run_covar() returns five columns of data: the trailing covariances, the variances, and the mean values of the two columns of the argument tseries. This allows calculating the trailing correlations, betas, and alphas.

Value

A matrix with five columns of data: the trailing covariances, the variances, and the mean values of the two columns of the argument tseries.

Examples

## Not run: 
# Calculate historical returns
retp <- zoo::coredata(na.omit(rutils::etfenv$returns[, c("IEF", "VTI")]))
# Calculate the trailing covariance
lambdaf <- 0.9 # Decay factor
covars <- HighFreq::run_covar(retp, lambda=lambdaf)
# Calculate the trailing correlation
correl <- covars[, 1]/sqrt(covars[, 2]*covars[, 3])
# Calculate the trailing covariance using R code
nrows <- NROW(retp)
retm <- matrix(numeric(2*nrows), nc=2)
retm[1, ] <- retp[1, ]
retd <- matrix(numeric(2*nrows), nc=2)
covarr <- numeric(nrows)
covarr[1] <- retp[1, 1]*retp[1, 2]
for (it in 2:nrows) {
  retm[it, ] <- lambdaf*retm[it-1, ] + (1-lambdaf)*(retp[it, ])
  retd[it, ] <- retp[it, ] - retm[it, ]
  covarr[it] <- lambdaf*covarr[it-1] + (1-lambdaf)*retd[it, 1]*retd[it, 2]
} # end for
all.equal(covars[, 1], covarr, check.attributes=FALSE)

## End(Not run)

algoquant/HighFreq documentation built on Oct. 26, 2024, 9:20 p.m.