R help - Jul 2010 - Can anybody help me understand AIC and BIC and devise a new metric?

Hi all,

Could anybody please help me understand AIC and BIC and especially why do
they make sense?

Furthermore, I am trying to devise a new metric related to the model
selection in the financial asset management industry.

As you know the industry uses Sharpe Ratio as the main performance
benchmark, which is the annualized mean of returns divided by the annualized
standard deviation of returns. 

In model selection, we would like to choose a model that yields the highest
Sharpe Ratio.

However, the more parameters you use, the higher Sharpe Ratio you might
potentially get, and the higher risk that your model is overfitted. 

I am trying to think of a AIC or BIC version of the Sharpe Ratio that
facilitates the model selection...

Anybody could you please give me some pointers? 

Thanks a lot! 
-- 
View this message in context:
http://r.789695.n4.nabble.com/Can-anybody-help-me-understand-AIC-and-BIC-and-devise-a-new-metric-tp2278448p2278448.html
Sent from the R help mailing list archive at Nabble.com.

On Jul 5, 2010, at 10:35 AM, LosemindL wrote:
>
> Hi all,
>
> Could anybody please help me understand AIC and BIC and especially  
> why do
> they make sense?
>
> Furthermore, I am trying to devise a new metric related to the model
> selection in the financial asset management industry.
>
> As you know the industry uses Sharpe Ratio as the main performance
> benchmark, which is the annualized mean of returns divided by the  
> annualized
> standard deviation of returns.
>
> In model selection, we would like to choose a model that yields the  
> highest
> Sharpe Ratio.
>
> However, the more parameters you use, the higher Sharpe Ratio you  
> might
> potentially get, and the higher risk that your model is overfitted.
>
> I am trying to think of a AIC or BIC version of the Sharpe Ratio that
> facilitates the model selection...
>
> Anybody could you please give me some pointers?
>
From: http://www.R-project.org/posting-guide.html

"Basic statistics and classroom homework: R-help is not intended for  
these."

Perhaps following some link on Wikipedia, instead?

-- 
David Winsemius, MD
West Hartford, CT

Hi:

On Mon, Jul 5, 2010 at 7:35 AM, LosemindL <comtech.usa@gmail.com> wrote:
>
> Hi all,
>
> Could anybody please help me understand AIC and BIC and especially why do
> they make sense?
>
Any good text that discusses model selection in detail will have some
discussion of
AIC and BIC. Frank Harrell's book 'Regression Modeling Strategies'
comes
immediately
to mind, along with Hastie, Tibshirani and Friedman (Elements of Statistical
Learning)
and Burnham and Anderson's book (Model Selection and Multi-Model Inference),
but
there are many other worthy texts that cover the topic. The gist is that AIC
and BIC
penalize the log likelihood of a model by subtracting different functions of
its number
of parameters. David's suggestion of Wikipedia is also on target.
>
> Furthermore, I am trying to devise a new metric related to the model
> selection in the financial asset management industry.
>
> As you know the industry uses Sharpe Ratio as the main performance
> benchmark, which is the annualized mean of returns divided by the
> annualized
> standard deviation of returns.
>
I didn't know, but thank you for the information. Isn't this simply a
signal-to-noise
ratio quantified on an annual basis?
>
> In model selection, we would like to choose a model that yields the highest
> Sharpe Ratio.
>
> However, the more parameters you use, the higher Sharpe Ratio you might
> potentially get, and the higher risk that your model is overfitted.
>
> I am trying to think of a AIC or BIC version of the Sharpe Ratio that
> facilitates the model selection...
>
You might be able to make some progress if you can express the (penalized)
log likelihood as a function of the Sharpe ratio. But if you have several
years of
data in your model and the ratio is computed annually, then isn't it a
random
variable rather than a parameter? If so, it changes the nature of the
problem, no?
(Being unfamiliar with the Sharpe ratio, I fully recognize that I may be
completely
off-base in this suggestion, but I'll put it out there anyway :)

BTW, you might find the R-sig-finance list to be a more productive resource
in
this problem than R-help due to the specialized nature of the question.

HTH,
Dennis
>
> Anybody could you please give me some pointers?
>
> Thanks a lot!
> --
> View this message in context:
>
http://r.789695.n4.nabble.com/Can-anybody-help-me-understand-AIC-and-BIC-and-devise-a-new-metric-tp2278448p2278448.html
> Sent from the R help mailing list archive at Nabble.com.
>
> ______________________________________________
> R-help@r-project.org mailing list
> https://stat.ethz.ch/mailman/listinfo/r-help
> PLEASE do read the posting guide
> http://www.R-project.org/posting-guide.html
> and provide commented, minimal, self-contained, reproducible code.
>
	[[alternative HTML version deleted]]