Author: dabacon

In this Saturday’s New York Times, in an article titled The Chasm Between Consumers and the Fed, I found the most amazing chart:

Of course I am not a financial journalist, so I have absolutely no understanding of the gigantic amoeba-like-shaded-area in this chart. But it looks very cool and very much like it represents something about which the article has much to say. Sadly, however, the New York Times does not provide the methodology it used in obtaining the amazing fact that six of the points can be grouped together while those other two points are excluded from the party. What astounding mathematical finance model did the Grey Lady use to come up with this plot (I’ll be it involves Ito calculus)?
Frustrated by the lack of transparency, I decided that it would be best if I tried to come up with my own methods and models for obtaining this graph. My first attempt, after scouring the economics literature and using some advance methods (related to integrating over Banach spaces) was the following

As you can see this model seems to pick out the overall rate of return as the defining characteristic. After much great reflection, and reacquainting myself with some obscure results from the theory of hyperbolic partial differential equations and new deep learning techniques from machine learning, I was able to tweak my model a bit and obtained the following

Now this is a beautiful plot, but it clearly does not reproduce the graph from the New York Times. What exactly, was I missing in order to obtain the giant amoeba of correlation?
But then I remembered…I’m not a financial journalist. I’m a physicist. And so, I took a look at the stats notes I took as a physics major at Caltech, quickly plugged in some numbers, and obtained a new, reality based, version of the plot

Well it’s not the New York Time plot. But I like it a lot.