Universal Risk Budgeting

I juxtapose Cover's vaunted universal portfolio selection algorithm (Cover 1991) with the modern representation (Qian 2016; Roncalli 2013) of a portfolio as a certain allocation of risk among the available assets, rather than a mere allocation of capital. Thus, I define a Universal Risk Budgeting scheme that weights each risk budget (instead of each capital budget) by its historical performance record (a la Cover). I prove that my scheme is mathematically equivalent to a novel type of Cover and Ordentlich 1996 universal portfolio that uses a new family of prior densities that have hitherto not appeared in the literature on universal portfolio theory. I argue that my universal risk budget, so-defined, is a potentially more perspicuous and flexible type of universal portfolio; it allows the algorithmic trader to incorporate, with advantage, his prior knowledge (or beliefs) about the particular covariance structure of instantaneous asset returns. Say, if there is some dispersion in the volatilities of the available assets, then the uniform (or Dirichlet) priors that are standard in the literature will generate a dangerously lopsided prior distribution over the possible risk budgets. In the author's opinion, the proposed "Garivaltis prior" makes for a nice improvement on Cover's timeless expert system (Cover 1991), that is properly agnostic and open (from the very get-go) to different risk budgets. Inspired by Jamshidian 1992, the universal risk budget is formulated as a new kind of exotic option in the continuous time Black and Scholes 1973 market, with all the pleasure, elegance, and convenience that that entails.Comment: 25 pages, 8 figure

Bayesian calibration of the nitrous oxide emission module of an agro-ecosystem model

Nitrous oxide (N2O) is the main biogenic greenhouse gas contributing to the global warming potential (GWP) of agro-ecosystems. Evaluating the impact of agriculture on climate therefore requires a capacity to predict N2O emissions in relation to environmental conditions and crop management. Biophysical models simulating the dynamics of carbon and nitrogen in agro-ecosystems have a unique potential to explore these relationships, but are fraught with high uncertainties in their parameters due to their variations over time and space. Here, we used a Bayesian approach to calibrate the parameters of the N2O submodel of the agro-ecosystem model CERES-EGC. The submodel simulates N2O emissions from the nitrification and denitrification processes, which are modelled as the product of a potential rate with three dimensionless factors related to soil water content, nitrogen content and temperature. These equations involve a total set of 15 parameters, four of which are site-specific and should be measured on site, while the other 11 are considered global, i.e. invariant over time and space. We first gathered prior information on the model parameters based on the literature review, and assigned them uniform probability distributions. A Bayesian method based on the Metropolis–Hastings algorithm was subsequently developed to update the parameter distributions against a database of seven different field-sites in France. Three parallel Markov chains were run to ensure a convergence of the algorithm. This site-specific calibration significantly reduced the spread in parameter distribution, and the uncertainty in the N2O simulations. The model’s root mean square error (RMSE) was also abated by 73% across the field sites compared to the prior parameterization. The Bayesian calibration was subsequently applied simultaneously to all data sets, to obtain better global estimates for the parameters initially deemed universal. This made it possible to reduce the RMSE by 33% on average, compared to the uncalibrated model. These global parameter values may be used to obtain more realistic estimates of N2O emissions from arable soils at regional or continental scales

Minimum Description Length Induction, Bayesianism, and Kolmogorov Complexity

The relationship between the Bayesian approach and the minimum description length approach is established. We sharpen and clarify the general modeling principles MDL and MML, abstracted as the ideal MDL principle and defined from Bayes's rule by means of Kolmogorov complexity. The basic condition under which the ideal principle should be applied is encapsulated as the Fundamental Inequality, which in broad terms states that the principle is valid when the data are random, relative to every contemplated hypothesis and also these hypotheses are random relative to the (universal) prior. Basically, the ideal principle states that the prior probability associated with the hypothesis should be given by the algorithmic universal probability, and the sum of the log universal probability of the model plus the log of the probability of the data given the model should be minimized. If we restrict the model class to the finite sets then application of the ideal principle turns into Kolmogorov's minimal sufficient statistic. In general we show that data compression is almost always the best strategy, both in hypothesis identification and prediction.Comment: 35 pages, Latex. Submitted IEEE Trans. Inform. Theor

On Universal Prediction and Bayesian Confirmation

The Bayesian framework is a well-studied and successful framework for inductive reasoning, which includes hypothesis testing and confirmation, parameter estimation, sequence prediction, classification, and regression. But standard statistical guidelines for choosing the model class and prior are not always available or fail, in particular in complex situations. Solomonoff completed the Bayesian framework by providing a rigorous, unique, formal, and universal choice for the model class and the prior. We discuss in breadth how and in which sense universal (non-i.i.d.) sequence prediction solves various (philosophical) problems of traditional Bayesian sequence prediction. We show that Solomonoff's model possesses many desirable properties: Strong total and weak instantaneous bounds, and in contrast to most classical continuous prior densities has no zero p(oste)rior problem, i.e. can confirm universal hypotheses, is reparametrization and regrouping invariant, and avoids the old-evidence and updating problem. It even performs well (actually better) in non-computable environments.Comment: 24 page

Is there a physically universal cellular automaton or Hamiltonian?

It is known that both quantum and classical cellular automata (CA) exist that are computationally universal in the sense that they can simulate, after appropriate initialization, any quantum or classical computation, respectively. Here we introduce a different notion of universality: a CA is called physically universal if every transformation on any finite region can be (approximately) implemented by the autonomous time evolution of the system after the complement of the region has been initialized in an appropriate way. We pose the question of whether physically universal CAs exist. Such CAs would provide a model of the world where the boundary between a physical system and its controller can be consistently shifted, in analogy to the Heisenberg cut for the quantum measurement problem. We propose to study the thermodynamic cost of computation and control within such a model because implementing a cyclic process on a microsystem may require a non-cyclic process for its controller, whereas implementing a cyclic process on system and controller may require the implementation of a non-cyclic process on a "meta"-controller, and so on. Physically universal CAs avoid this infinite hierarchy of controllers and the cost of implementing cycles on a subsystem can be described by mixing properties of the CA dynamics. We define a physical prior on the CA configurations by applying the dynamics to an initial state where half of the CA is in the maximum entropy state and half of it is in the all-zero state (thus reflecting the fact that life requires non-equilibrium states like the boundary between a hold and a cold reservoir). As opposed to Solomonoff's prior, our prior does not only account for the Kolmogorov complexity but also for the cost of isolating the system during the state preparation if the preparation process is not robust.Comment: 27 pages, 1 figur

Free Lunch for Optimisation under the Universal Distribution

Function optimisation is a major challenge in computer science. The No Free Lunch theorems state that if all functions with the same histogram are assumed to be equally probable then no algorithm outperforms any other in expectation. We argue against the uniform assumption and suggest a universal prior exists for which there is a free lunch, but where no particular class of functions is favoured over another. We also prove upper and lower bounds on the size of the free lunch

HypTrails: A Bayesian Approach for Comparing Hypotheses About Human Trails on the Web

When users interact with the Web today, they leave sequential digital trails on a massive scale. Examples of such human trails include Web navigation, sequences of online restaurant reviews, or online music play lists. Understanding the factors that drive the production of these trails can be useful for e.g., improving underlying network structures, predicting user clicks or enhancing recommendations. In this work, we present a general approach called HypTrails for comparing a set of hypotheses about human trails on the Web, where hypotheses represent beliefs about transitions between states. Our approach utilizes Markov chain models with Bayesian inference. The main idea is to incorporate hypotheses as informative Dirichlet priors and to leverage the sensitivity of Bayes factors on the prior for comparing hypotheses with each other. For eliciting Dirichlet priors from hypotheses, we present an adaption of the so-called (trial) roulette method. We demonstrate the general mechanics and applicability of HypTrails by performing experiments with (i) synthetic trails for which we control the mechanisms that have produced them and (ii) empirical trails stemming from different domains including website navigation, business reviews and online music played. Our work expands the repertoire of methods available for studying human trails on the Web.Comment: Published in the proceedings of WWW'1

The SWELLS Survey. VI. hierarchical inference of the initial mass functions of bulges and discs

The long-standing assumption that the stellar initial mass function (IMF) is universal has recently been challenged by a number of observations. Several studies have shown that a "heavy" IMF (e.g., with a Salpeter-like abundance of low mass stars and thus normalisation) is preferred for massive early-type galaxies, while this IMF is inconsistent with the properties of less massive, later-type galaxies. These discoveries motivate the hypothesis that the IMF may vary (possibly very slightly) across galaxies and across components of individual galaxies (e.g. bulges vs discs). In this paper we use a sample of 19 late-type strong gravitational lenses from the SWELLS survey to investigate the IMFs of the bulges and discs in late-type galaxies. We perform a joint analysis of the galaxies' total masses (constrained by strong gravitational lensing) and stellar masses (constrained by optical and near-infrared colours in the context of a stellar population synthesis [SPS] model, up to an IMF normalisation parameter). Using minimal assumptions apart from the physical constraint that the total stellar mass within any aperture must be less than the total mass within the aperture, we find that the bulges of the galaxies cannot have IMFs heavier (i.e. implying high mass per unit luminosity) than Salpeter, while the disc IMFs are not well constrained by this data set. We also discuss the necessity for hierarchical modelling when combining incomplete information about multiple astronomical objects. This modelling approach allows us to place upper limits on the size of any departures from universality. More data, including spatially resolved kinematics (as in paper V) and stellar population diagnostics over a range of bulge and disc masses, are needed to robustly quantify how the IMF varies within galaxies.Comment: Accepted for publication in MNRAS. 15 pages, 8 figures. Code available at https://github.com/eggplantbren/SWELLS_Hierarchica