CFRM 461

Probability and Statistics for Computational Finance

Introduction to R

Bin Zou
binzou@[Link]

Department of Applied Mathematics

University of Washington

2017 Spring Quarter

 Outline

1 Brief Introduction

2 Basic Mathematical Operations

3 Vector and Matrix Operations

4 Graphic Features

5 Writing Your Own Functions

6 Extra

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 Resource
I [Link]
Online courses on R, Python, data mining, machine learning ...
I Guy Yollin: R Programming for Quantitative Finance
[Link]
I [Link]
Software
I R is a free software environment for statistical computing and
graphics. Please download R from its website:
[Link]
I R-Studio is an integrated development environment (IDE) for R.
[Link]
Remark: Please install R-Studio before the lectures.

Credits: Some slides are modified from Kjell Konis’s notes.

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 R-Studio Interface

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 I Double click on [Link] to start R-Studio.
I Type q() or click on X on the upper right corner to quit R.
I Need help? help(), [Link](), example(),...
I The > symbol is called the prompt: R is prompting you to enter a
command. You may change > to a different symbol.
I R is case sensitive, TRUE is not the same as true.
I To add comments to the codes, use # (hashmark/pound key).
Any input following a # is ignored (until the next new line).
I If a command goes for more than one line, use + for new line(s).
I List objects/variables in the workspace, use objects() or ls().
I Remove objects/variables in the workspace, use rm().
To remove all objects, use rm( list = ls() )
I Upon exiting R, you can save available objects in [Link],
and command lines in [Link].
I You can save codes in name.R file, and use command
source("name.R") to run it.
I To clear the console in R, use Ctrl + L.

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 Reserved Constants
I Constant π: pi

1 > pi
2 [ 1 ] 3.141593

I Infinity: Inf; Negative infinity: -Inf; Not a Number (NaN): NaN

1 > 1/0
2 [1] Inf
3 > log (0)
4 [ 1 ] −I n f
5 > 0/0
6 [ 1 ] NaN

I Imaginary unit: i (i2 = −1)

I Exponential part E

1 > 3 . 4 E5
2 [ 1 ] 340000

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 Outline

1 Brief Introduction

2 Basic Mathematical Operations

3 Vector and Matrix Operations

4 Graphic Features

5 Writing Your Own Functions

6 Extra

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 Using R as a Calculator

Operation Command Example

Addition + 3 + 4
Subtraction - 10 - 6
Multiplication * 2 * 3
Division / 15 / 5
Exponential ^ 2 ^ 3
Modulo %% 26 %% 3

Table 1: Arithmetic Operations in R

The modulo (also called modulus) operation finds the remainder after
division of one number by another.

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 1 > 3 + 4
2 [1] 7
3 > 10 − 6
4 [1] 4
5 > 2 ∗ 3
6 [1] 6
7 > 15 / 5
8 [1] 3
9 > 2 ˆ 3
10 [1] 8
11 > 26 %% 3
12 [1] 2

Bin Zou (UW) CFRM 461 9/40

 Basic Math Functions

exp exponential log logarithm

sin sine cos cosine
asin inverse sine acos inverse cosine
tan tangent atan inverse tangent
sqrt square root abs absolute value
max maximum min minimum
Q
sum summation Σ prod product
factorial n! sign 1(+) -1(-)
round to the nearest floor/ceiling round down/up
range min max sort ascending order

Table 2: Basic Math Functions in R

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 1 > sqrt (81)
2 [1] 9
3 > log (1)
4 [1] 0
5 > exp ( 1 )
6 [ 1 ] 2.718282
7 > s i n ( pi / 2)
8 [1] 1
9 > cos ( pi / 2)
10 [ 1 ] 6 . 1 2 3 0 3 2 e −17
11 > tan ( p i / 4 )
12 [1] 1
13 > abs ( −10)
14 [ 1 ] 10
15 > f a c t o r i a l (5)
16 [ 1 ] 120
17 > s i g n ( −5)
18 [ 1 ] −1
19 > round ( 2 . 7 )
20 [1] 3
21 > floor (2.7)
22 [1] 2
23 > ceiling (2.7)
24 [1] 3

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 Credits: from Kjell Konis
More examples:

1 > tan ( p i )
2 [ 1 ] −1.224647 e −16
3 > cos ( pi / 2)
4 [ 1 ] 6 . 1 2 3 0 3 2 e −17

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 Assigning Scalar Variables

I Variable names need to start with a letter or a dot (.), followed

by some combination of letters, digits, or special characters.
e.g., x, y_1
I Names are case sensitive, e.g., Bin01 and bin01 are different.
I Avoid reserved words by R, e.g.,
if else repeat while function for in next ...
To assign value to a variable, use <- or ->. (= can be used as well.)

1 > x <− 5
2 > ( x <− 5 )
3 [1] 5

Remark: To display the results, put () around the command.

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 1 > x <− 5
2 > y = x ˆ2
3 > ls ()
4 [ 1 ] ”x” ”y”
5 > x
6 [1] 5
7 > y
8 [ 1 ] 25
9 > rm ( x )
10 > ls ()
11 [ 1 ] ”y”

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 Data Types
Basic data types:
I numeric
e.g., 3.19
I logical
e.g., TRUE, FALSE, NA (ATTENTION: case sensitive)
I character
e.g., “Bin” (string/text) Use "" or ’’ to enter
1 > ( x num <− 3 . 1 9 )
2 [ 1 ] 3.19
3 > ( x l o g <− FALSE)
4 [ 1 ] FALSE
5 > 2 > 1
6 [ 1 ] TRUE
7 > ( x cha <− ” Bin ” )
8 [ 1 ] ” Bin ”

To check the class of a variable, use class() or mode():

1 > class (x log )

2 [1] ”logical”

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 How can we change data types?

1 > ( x <− 1 : 5 )
2 [1] 1 2 3 4 5
3 > mode ( x )
4 [ 1 ] ” numeric ”
5 > ( x cha <− a s . c h a r a c t e r ( x ) )
6 [ 1 ] ”1” ”2” ”3” ”4” ”5”
7 > mode ( x cha )
8 [ 1 ] ” character ”
9 > ( x num <− a s . i n t e g e r ( x cha ) )
10 [1] 1 2 3 4 5
11 > mode ( x num)
12 [ 1 ] ” numeric ”
13 [ 1 ] 1+0 i 2+0 i 3+0 i 4+0 i 5+0 i
14 > c l a s s ( x com )
15 [ 1 ] ” complex ”

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 Logical Comparisons
I <: for less than
I >: for greater than
I <=: for less than or equal to
I >=: for greater than or equal to
I ==: for equal to each other
I !=: not equal to each other
I &: logical “and”
I |: logical “or”
I !: logical “not” (negation)
1 > 6 > 5
2 [ 1 ] TRUE
3 > 3 <= 10
4 [ 1 ] TRUE
5 > 2 == 2
6 [ 1 ] TRUE
7 > 2 != 2
8 [ 1 ] FALSE
9 > 2>1 & 3<5
10 [ 1 ] TRUE
11 > 2==1 | 4>=5
12 [ 1 ] FALSE

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 Outline

1 Brief Introduction

2 Basic Mathematical Operations

3 Vector and Matrix Operations

4 Graphic Features

5 Writing Your Own Functions

6 Extra

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 Creating Vectors
I c(): combine function
1 > ( v e c num <− c ( 1 . 1 , 2 . 2 , 3 . 3 , 4 . 4 , 5 . 5 ) )
2 [ 1 ] 1.1 2.2 3.3 4.4 5.5
3 > ( v e c l o g <− c (TRUE, FALSE, TRUE) )
4 [ 1 ] TRUE FALSE TRUE
5 > ( v e c cha <− c ( ” Bin ” , ”Zou” ) )
6 [ 1 ] ” Bin ” ”Zou”

I assign()
1 > a s s i g n ( ”x” , c ( 1 . 1 , 2 . 2 , 3 . 3 , 4 . 4 , 5 . 5 ) )
2 > x
3 [ 1 ] 1.1 2.2 3.3 4.4 5.5

I 1:10 is the same as c(1,2,...,9,10)

1 > ( y <− 1 : 1 0 )
2 [1] 1 2 3 4 5 6 7 8 9 10

I seq(from=value, to=value, by=value, length=value)

1 > s e q ( from =1 , t o =5 , by =0.5)
2 [ 1 ] 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

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 I rep(): replicate/copy vectors

1 > x
2 [ 1 ] 1.1 2.2 3.3 4.4 5.5
3 > rep (x , times = 2)
4 [ 1 ] 1.1 2.2 3.3 4.4 5.5 1.1 2.2 3.3 4.4 5.5
5 > r e p ( x , each = 3 )
6 [ 1 ] 1.1 1.1 1.1 2.2 2.2 2.2 3.3 3.3 3.3 4.4 4.4 4.4 5.5
5.5 5.5

Note: Use the above examples to study the differences of options

times and each.
Remark: Colon : has high priority in operations. See the following
example.

1 > 10:1
2 [ 1 ] 10 9 8 7 6 5 4 3 2 1
3 > 2∗ 1 :5
4 [1] 2 4 6 8 10
5 > (2 ∗ 1) : 5
6 [1] 2 3 4 5

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 Name a vector: names()

1 > names ( v e c cha ) <− c ( ” F i r s t Name” , ” L a s t Name” )

2 > v e c cha
3 F i r s t Name L a s t Name
4 ” Bin ” ”Zou”

Alternatively, a vector can be created to record the names first. The

advantage is that such name vector can be used multiple times.

1 > v e c name <− c ( ”Monday” , ” Tuesday ” , ”Wednesday” , ” Thursday ”

, ” Friday ” )
2 > sbux <− c ( 5 4 . 6 3 , 5 4 . 2 7 , 5 4 . 5 4 , 5 4 . 8 0 , 5 5 . 7 8 )
3 > s c u . t o <− c ( 1 . 5 5 , 1 . 6 0 , 1 . 6 2 , 1 . 6 1 , 1 . 6 6 )
4 > names ( sbux ) <− v e c name
5 > names ( s c u . t o ) <− v e c name
6 > sbux ; s c u . t o
7 Monday Tuesday Wednesday Thursday Friday
8 54.63 54.27 54.54 54.80 55.78
9 Monday Tuesday Wednesday Thursday Friday
10 1.55 1.60 1.62 1.61 1.66

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 Vector Commands
I length(): size of a variable
I sum(): summation of a vector

1 > ( x <− s e q ( 1 , 1 0 ) )
2 [1] 1 2 3 4 5 6 7 8 9 10
3 > ( y <− s e q ( 1 , 5 , 0 . 5 ) )
4 [ 1 ] 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
5 > z <− s e q (1 , −5 , −0.5)
6 > z
7 [1] 1.0 0.5 0 . 0 −0.5 −1.0 −1.5 −2.0 −2.5 −3.0 −3.5 −4.0
8 [ 1 2 ] −4.5 −5.0
9 > length (x)
10 [ 1 ] 10
11 > length ( z )
12 [ 1 ] 13
13 > Onehundred <− s e q ( 1 , 1 0 0 )
14 > sum ( Onehundred )
15 [ 1 ] 5050

Remark: What do [1] and [12] mean?

Exercise: Apply basic algebraic operations on vectors.

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 Selecting Elements of Vectors
vector[i]: i-th element of a vector if i is a number.
If i is a vector, then vector[i] selects elements from the positions
decided by vector i.

1 > SP500 C l o s e <− c ( ” 3 / 13 / 2017 ” = 2 3 7 3 . 4 7 , ” 3 / 14 / 2017 ” =

2 3 6 5 . 4 5 , ” 3 / 15 / 2017 ” = 2 3 6 8 . 9 4 , ” 3 / 16 / 2017 ” = 2 3 7 7 . 1 8 , ”
3 / 17 / 2017 ” = 2 3 7 7 . 6 4 )
2 > SP500 C l o s e [ 1 ]
3 3 / 13 / 2017
4 2373.47
5 > SP500 C l o s e [ ” 3 / 13 / 2017 ” ]
6 3 / 13 / 2017
7 2373.47
8 > SP500 C l o s e [ c ( 4 , 5 ) ]
9 3 / 16 / 2017 3 / 17 / 2017
10 2377.18 2377.64
11 > SP500 C l o s e [ 2 : 4 ]
12 3 / 14 / 2017 3 / 15 / 2017 3 / 16 / 2017
13 2365.45 2368.94 2377.18
14 > ( SP500 mean <− sum ( SP500 C l o s e ) / l e n g t h ( SP500 C l o s e ) )
15 [ 1 ] 2372.536
16 > mean ( SP500 C l o s e )
17 [ 1 ] 2372.536

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 Matrix I
matrix(data = NA, nrow = 1, ncol = 1, byrow = FALSE,
dimnames = NULL)
I data: data vector
I byrow: the matrix is filled by columns (FALSE) or rows (TRUE)

1 > mdat <− m a t r i x ( c ( 1 , 2 , 3 , 1 1 , 1 2 , 1 3 ) , nrow = 2 , n c o l = 3 ,

byrow = TRUE,
2 + dimnames = l i s t ( c ( ” row1 ” , ” row2 ” ) ,
3 + c ( ”C. 1 ” , ”C. 2 ” , ”C. 3 ” ) ) )
4 > mdat
5 C. 1 C. 2 C. 3
6 row1 1 2 3
7 row2 11 12 13
8
9 > mx <− m a t r i x ( c ( 1 , 2 , 3 , 4 , 5 , 6 ) , byrow = TRUE, nrow = 2 )
10 > mx
11 [ ,1] [ ,2] [ ,3]
12 [1 ,] 1 2 3
13 [2 ,] 4 5 6

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 Matrix II

1 > c o l 1 <− c ( 1 , 4 )
2 > c o l 2 <− c ( 2 , 5 )
3 > c o l 3 <− c ( 3 , 6 )
4 > (mx2 <− c b i n d ( c o l 1 , c o l 2 , c o l 3 ) )
5 col1 col2 col3
6 [1 ,] 1 2 3
7 [2 ,] 4 5 6
8 > row1 <− c ( 1 , 2 , 3 )
9 > row2 <− c ( 4 , 5 , 6 )
10 > (mx3 <− r b i n d ( row1 , row2 ) )
11 [ ,1] [ ,2] [ ,3]
12 row1 1 2 3
13 row2 4 5 6
14 > r name <− c ( ”Row 1 ” , ”Row 2 ” )
15 > rownames (mx2) <− r name
16 > mx2
17 col1 col2 col3
18 Row 1 1 2 3
19 Row 2 4 5 6

I cbind (rbind): Combine R Objects by Columns or Rows

I colnames (rownames): Column names or Row names of a matrix
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 1 > mx2
2 col1 col2 col3
3 Row 1 1 2 3
4 Row 2 4 5 6
5
6 > rowSums (mx2)
7 Row 1 Row 2
8 6 15
9 > colSums (mx2)
10 col1 col2 col3
11 5 7 9
12 > dim (mx2)
13 [1] 2 3

I rowSums: returns the summation of all rows of a matrix

I colSums: returns the summation of all columns of a matrix
I dim: returns the dimension of a matrix, row number and column
number

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 Selecting Elements of Matrix

1 > mx2
2 col1 col2 col3
3 Row 1 1 2 3
4 Row 2 4 5 6
5
6 > mx2 [ 1 , 2 ]
7 [1] 2
8 > mx2 [ 2 , 3 ]
9 [1] 6
10 > mx2 [ , 3 ]
11 [1] 3 6
12 > mx2 [ 2 , ]
13 [1] 4 5 6
14 > mx2 [ 1 , 2 : 3 ]
15 [1] 2 3
16 > mx2 [ 1 : 2 , 1 : 2 ]
17 col1 col2
18 Row 1 1 2
19 Row 2 4 5

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 Matrix III
1 > # c r e a t e a 2 by 5 m a t r i x u s i n g t h e data s e q ( 1 , 5 , 0 . 5 )
2 > x data <− s e q ( 1 , 5 , 0 . 5 )
3 > x <− a r r a y ( x data , dim = c ( 2 , 5 ) )
4 > x
5 [ ,1] [ ,2] [ ,3] [ ,4] [ ,5]
6 [1 ,] 1.0 2.0 3.0 4.0 5
7 [2 ,] 1.5 2.5 3.5 4.5 1
8
9 > i <− c ( 1 , 4 , 7 )
10 > x[ i ]
11 [ 1 ] 1.0 2.5 4.0
12
13 > j <− a r r a y ( c ( 1 , 2 , 3 , 2 ) , dim = c ( 2 , 2 ) )
14 > j
15 [ ,1] [ ,2]
16 [1 ,] 1 3
17 [2 ,] 2 2
18 > x[ j ]
19 [ 1 ] 3.0 2.5
20
21 > a r r a y ( 0 , dim = c ( 2 , 3 ) )
22 [ ,1] [ ,2] [ ,3]
23 [1 ,] 0 0 0
24 [2 ,] 0 0 0

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 Matrix Operations
I transpose of a matrix: t()
I multiplication: %*%
I crossproduct: crossprod(A, b) ⇔ t(A) %*% b
crossprod(A) ⇔ t(A) %*% A
I number of rows/columns: nrow() and ncol()
I diag(v): (1) if v is a vector, then diag(v) returns a diagonal
matrix; (2) if v is a matrix, then diag(v) return a vector of the
diagonal elements of v; (3) if v is a scalar number, then diag(v)
returns a v by v identity matrix
I Inverse of a matrix A: A−1 = solve(A)
Solving A x = b: x <- solve(A, b)
(less desired option: x <- solve(A) %*% b)
I ev <- eigen(A): eigenvalues and eigenvectors of a square matrix
ev$values and ev$vectors
Compute eigenvalues: eigen(A, [Link]=TRUE)$values
I determinant: det()
I out product: a %o% b or outer(a, b, "*")
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 1 > ( m1 <− m a t r i x ( c ( 1 , 3 , 2 , 5 ) , nrow = 2 , byrow = TRUE) )
2 [ ,1] [ ,2]
3 [1 ,] 1 3
4 [2 ,] 2 5
5 > ( m2 <− m a t r i x ( c ( 1 , 2 , 3 , 4 , 5 , 6 ) , nrow = 2 , byrow = TRUE) )
6 [ ,1] [ ,2] [ ,3]
7 [1 ,] 1 2 3
8 [2 ,] 4 5 6
9 > d e t (m1)
10 [ 1 ] −1
11 > ( m3 <− s o l v e (m1) )
12 [ ,1] [ ,2]
13 [1 ,] −5 3
14 [2 ,] 2 −1
15 > b <− c ( 2 , 4 )
16 > ( x <− s o l v e (m1 , b ) )
17 [1] 2 0
18 > ev <− e i g e n (m1)
19 > ev $ v a l u e s
20 [1] 6 . 1 6 2 2 7 7 7 −0.1622777
21 > ev $ v e c t o r s
22 [ ,1] [ ,2]
23 [ 1 , ] −0.5024547 −0.9324647
24 [ 2 , ] −0.8646035 0 . 3 6 1 2 6 1 0

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 Outline

1 Brief Introduction

2 Basic Mathematical Operations

3 Vector and Matrix Operations

4 Graphic Features

5 Writing Your Own Functions

6 Extra

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 Basic command: plot(x, y, ...)
Please use help("plot") to read the help document (see below):

Use demo(graphics) to study examples from R

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 1 > rm ( l i s t = l s ( ) )
2 > x <− s e q ( 0 , pi , l e n g t h = 1 0 0 )
3 > y <− s i n ( x )
4 > p l o t ( x , y , ” l ” , main=”y = s i n ( x ) ” )

To specify the plotting region, use xlim = and ylim =

e.g., xlim = c(0, pi/2)

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 1 > i n s t a l l . p a c k a g e s ( ”quantmod” )
2 > l i b r a r y ( quantmod )
3 > getSymbols ( ”SBUX” )
4 [ 1 ] ”SBUX”
5 > p l o t (SBUX, main = ” S t a r b u c k s S t o c k P r i c e ” )

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 1 > i n s t a l l . p a c k a g e s ( ”quantmod” )
2 > l i b r a r y ( quantmod )
3 > getSymbols ( ”SBUX” )
4 [ 1 ] ”SBUX”
5 > getSymbols ( ”MCD” )
6 [ 1 ] ”MCD”
7 > par ( mfrow = c ( 2 , 1 ) ) # 2 p l o t s i n one window
8 > p l o t (SBUX)
9 > p l o t (MCD)

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 Outline

1 Brief Introduction

2 Basic Mathematical Operations

3 Vector and Matrix Operations

4 Graphic Features

5 Writing Your Own Functions

6 Extra

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 Example
To calculate the correlation coefficient ρ of two variables X and Y
with observations xi and yi , i = 1, 2, · · · , n, we use
Pn
(xi − x̄)(yi − ȳ)
ρ = pPn i=1 Pn
2 2
i=1 i − x̄)
(x i=1 (xi − x̄)

1 c o r r e l <− f u n c t i o n ( x , y )
2 {
3 nx <− l e n g t h ( x )
4 ny <− l e n g t h ( y )
5 i f ( nx != ny )
6 s t o p ( ”Two i n p u t v e c t o r s have d i f f e r e n t d i m e n s i o n s ! ” )
7 x mean <− mean ( x )
8 y mean <− mean ( y )
9 xy <− sum ( ( x − x mean ) ∗ ( y − y mean ) )
10 x sq <− sum ( ( x − x mean ) ˆ 2 )
11 y sq <− sum ( ( y − y mean ) ˆ 2 )
12 c o r r <− xy / s q r t ( x sq ∗ y sq )
13 c a t ( ”The c o r r e l a t i o n c o e f f i c i e n t o f two v a r i a b l e s i s \n” )
14 corr
15 }

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 Outline

1 Brief Introduction

2 Basic Mathematical Operations

3 Vector and Matrix Operations

4 Graphic Features

5 Writing Your Own Functions

6 Extra

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 R Packages

I search(): list all currently loaded libraries

I find(): find the library for a function
I library(): list all libraries installed/load a library
I [Link](""): install packages
e.g., [Link]("quantmod")

1 > search ()
2 [ 1 ] ” . GlobalEnv ” ” tools : rstudio ” ” package : s t a t s ”
3 [ 4 ] ” package : g r a p h i c s ” ” package : g r D e v i c e s ” ” package : u t i l s ”
4 [ 7 ] ” package : d a t a s e t s ” ” package : methods ” ” Autoloads ”
5 [ 1 0 ] ” package : b a s e ”
6 > find (” solve ”)
7 [ 1 ] ” package : b a s e ”

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 In this course, we shall study regression models, probability, statistical
inference, etc, and almost all of them can be implemented in R as well.
Please study related materials on your own.

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