LSPM Joint Probability Tables

I’ve received several requests for methods to create joint probability tables for use in LSPM’s portfolio optimization functions.  Rather than continue to email this example to individuals who ask, I post it here in hopes they find it via a Google search. ;-)

I’m certain there are more robust ways to estimate this table, but the code below is a start…

‘x’ is a matrix of market system returns
‘n’ is the number of bins to create for each system
‘FUN’ is the function to use to calculate the value for each bin
‘…’ are args to be passed to ‘FUN’

jointProbTable <- function(x, n=3, FUN=median, …) {

  # Load LSPM

  if(!require(LSPM,quietly=TRUE)) stop(warnings())

  # Function to bin data

  quantize <- function(x, n, FUN=median, …) {

    if(is.character(FUN)) FUN <- get(FUN)

    bins <- cut(x, n, labels=FALSE)

    res <- sapply(1:NROW(x), function(i) FUN(x[bins==bins[i]], …))

  }

  # Allow for different values of ‘n’ for each system in ‘x’

  if(NROW(n)==1) {

    n <- rep(n,NCOL(x))

  } else

  if(NROW(n)!=NCOL(x)) stop(“invalid ‘n’")

  # Bin data in ‘x’

  qd <- sapply(1:NCOL(x), function(i) quantize(x[,i],n=n[i],FUN=FUN,…))

  # Aggregate probabilities

  probs <- rep(1/NROW(x),NROW(x))

  res <- aggregate(probs, by=lapply(1:NCOL(qd), function(i) qd[,i]), sum)

  # Clean up output, return lsp object

  colnames(res) <- colnames(x)

  res <- lsp(res[,1:NCOL(x)],res[,NCOL(res)])

  return(res)

}

# Example

N <- 30

x <- rnorm(N)/100; y <- rnorm(N)/100; z <- rnorm(N)/100

zz <- cbind(x,y,z)

(jpt <- jointProbTable(zz,n=c(4,3,3)))