Re: st: RE: Methodology question

[P Ram <analyst.q@gmail.com>]

Dear Peter,

Thanks so much for your kind guidance. Apologies for not replying
earlier...my net conn was down. Your suggestion was very helpful
indeed.

Kindest regards,
Prasad

On Wed, Jun 16, 2010 at 9:28 PM, Lachenbruch, Peter
<Peter.Lachenbruch@oregonstate.edu> wrote:
> This procedure is essentially a stepwise regression and has all the headaches associated with this procedure.  The book by Frank Harrell in Springer series (about 2002) discusses this.  You might also investigate the lars command, but you need to read up on variable selection methods a bit.
>
> Tony
>
> Peter A. Lachenbruch
> Department of Public Health
> Oregon State University
> Corvallis, OR 97330
> Phone: 541-737-3832
> FAX: 541-737-4001
>
>
> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Prasad Ramani
> Sent: Wednesday, June 16, 2010 10:10 AM
> To: statalist@hsphsun2.harvard.edu
> Subject: st: Methodology question
>
> Dear Statalist,
>
> I am new here and my question is quite different from what is normally
> asked here. I have a few questions more from an application point of
> view.
>
> The Project
> ===========
> I am analyzing a multi asset class portfolio whose composition has
> changed over the years from mainly equities to a mix of equities,
> fixed income, hedge funds & private equity. The objective of the
> analysis is to find which risk factors the portfolio is exposed to and
> how to hedge them. The data is a monthly series of returns of this
> portfolio for the past 7-8 years.
>
> My Proposed Methodology
> ====================
> 1. Get monthly returns for a list of indices that represent the major
> asset classes: For equities: SP500, MSCI World etc., for Fixed Income:
> BarCap US Aggregate Bond fund, JP Morgan Emerging Market Bond index,
> for Commodities: Gold, Oil, for Interest rates: 3 month LIBOR etc. I
> end up with about 15 such factors...Factor 1 to Factor 15.
>
> 2. I come up with a correlation structure for these 15 factors based
> on weekly/monthly returns going back to about 3 years.
>
> 3. I regress the returns of my portfolio against these 15
> factors...and based on the t-stats of the factors and the overall adj
> r-squared, I eliminate those factors that are insignificant at 5%
> level.
>
> 4. I expect the ones with low t-stats to be highly correlated to some
> other factors...and this can be verified from the above Var-Covar
> matrix (point 2)
> Finally I end up with those factors that have significant t-stats,
> F-stat and adj r-squared.
>
> I would really appreciate if you can give me your views on this.
>
> Many thanks,
> Raman
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