Eran Raviv Blog

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Modern statistics and econometrics with application to capital markets.

Eran Raviv Blog

5M ago

The issue of bias in AI has become a focal point in recent discussions, both in the academia and amongst practitioners and policymakers. I observe a lot of confusion and diffusion in those discussions. At the risk of seeming patronizing, my advice is to engage only with the understanding of the specific jargon which is used, and particularly how it’s used in this context. Misunderstandings create confusion and blur the path forward.
Here is a negative, yet typical example:
In artificial intelligence (AI)-based predictive models, bias – defined as unfair systematic error – is a growing source ..read more

Eran Raviv Blog

5M ago

If you are reading this, you already know that the covariance matrix represents unconditional linear dependency between the variables. Far less mentioned is the bewitching fact that the elements of the inverse of the covariance matrix (i.e. the precision matrix) encode the conditional linear dependence between the variables. This post shows why that is the case. I start with the motivation to even discuss this, then the math, then some code.
Wide data matrices, where , are widespread nowadays (pun intended). In this situation a good, stable and reliable estimate for the covariance matrix is ha ..read more

Eran Raviv Blog

8M ago

Remarkably, considering that correlation modelling dates back to 1890, statisticians still make meaningful progress in this area. A recent step forward is given in A New Coefficient of Correlation by Sourav Chatterjee. I wrote about it shortly after it came out, and it has since garnered additional attention and follow-up results. The more I read about it, the more I am impressed with it. This post provides some additional details based on recent research.
What is Chatterjee’s rank correlation?
The formula for Chatterjee’s rank correlation:
is the rank of and is rearranged to ..read more

Eran Raviv Blog

10M ago

Each year I supervise several data-science master’s students, and each year I find myself repeating the same advises. Situation has worsen since students started (mis)using GPT models. I therefore have written this blog post to highlight few important, and often overlooked, aspects of thesis-writing. Many points apply also to writing in general.
On writing
“Easy reading is damn hard writing.” (Nathaniel Hawthorne). An inexperienced writer can easily take two working days to write (well) half of A4 page. Writing properly becomes even more challenging if you’re stressed because of a deadline. S ..read more

Eran Raviv Blog

10M ago

AI algorithms are in the air. The success of those algorithms is largely attributed to dimension expansions, which makes it important for us to consider that aspect.
Matrix multiplication can be beneficially perceived as a way to expand the dimension. We begin with a brief discussion on PCA. Since PCA is predominantly used for reducing dimensions, and since you are familiar with PCA already, it serves as a good springboard by way of a contrasting example for dimension expansion. Afterwards we show some basic algebra via code, and conclude with a citation that provides the intuition for the rea ..read more

Eran Raviv Blog

11M ago

Welcome 2024.
This blog is just a personal hobby. When I’m extra busy as I was this year the blog is a front-line casualty. This is why 2023 saw a weaker posting stream. Nonetheless I am pleased with just over 30K visits this year, with an average of roughly one minute per visit (engagement time, whatever google-analytics means by that). This year I only provide the top two posts (rather than the usual 3). Both posts have to do with statistical shrinkage:
The one is Statistical Shrinkage (2) and the other is Statistical Shrinkage (3).
On the left (scroll down) you can find the most popular po ..read more

Eran Raviv Blog

11M ago

Matrix multiplication is a fundamental computation in modern statistics. It’s at the heart of all concurrent serious AI applications. The size of the matrices nowadays is gigantic. On a good system it takes around 30 seconds to estimate the covariance of a data matrix with dimensions , a small data today’s standards mind you. Need to do it 10000 times? wait for roughly 80 hours. Have larger data? running time grows exponentially. Want a more complex operation than covariance estimate? forget it, or get ready to dig deep into your pockets.
We, mere minions who are unable to splurge thousands of ..read more

Eran Raviv Blog

1y ago

A common issue encountered in modern statistics involves the inversion of a matrix. For example, when your data is sick with multicollinearity your estimates for the regression coefficient can bounce all over the place.
In finance we use the covariance matrix as an input for portfolio construction. Analogous to the fact that variance must be positive, covariance matrix must be positive definite to be meaningful. The focus of this post is on understanding the underlying issues with an unstable covariance matrix, identifying a practical solution for such an instability, and connecting that solut ..read more

Eran Raviv Blog

1y ago

Imagine you’re picking from 1,000 money managers. If you test just one, there’s a 5% chance you might wrongly think they’re great. But test 10, and your error chance jumps to 40%. To keep your error rate at 5%, you need to control the “family-wise error rate.” One method is to set higher standards for judging a manager’s talent, using a tougher t-statistic cut-off. Instead of the usual 5% cut (t-stat=1.65), you’d use a 0.5% cut (t-stat=2.58).
When testing 1,000 managers or strategies, the challenge increases. You’d need a manager with an extremely high t-stat of about 4 to stay within the 5% e ..read more

Eran Raviv Blog

1y ago

During 2017 I blogged about Statistical Shrinkage. At the end of that post I mentioned the important role signal-to-noise ratio (SNR) plays when it comes to the need for shrinkage. This post shares some recent related empirical results published in the Journal of Machine Learning Research from the paper Randomization as Regularization. While mainly for tree-based algorithms, the intuition undoubtedly extends to other numerical recipes also.
While bootstrap aggregation (bagging) use all explanatory variables in the creation of the forecast, the random forest (RF from hereon) algorithms choose o ..read more