State space analysis basics of investing

Fundamental analysis is used most often for stocks, but it is useful for evaluating any security, from a bond to a derivative. If you consider the fundamentals, from the broader economy to the company details, you are doing a fundamental analysis. Fundamental Analysis vs. Technical Analysis This method of analysis starkly contrasts with technical analysis, which attempts to forecast price direction through analyzing historical market data such as price and volume.

Technical analysis uses price trends and price action to create indicators. Some of the indicators create patterns that have names resembling their shapes, such as the head and shoulders pattern. Others use trend, support, and resistance lines to demonstrate how traders view investments and indicate what will happen. Some examples are the symmetrical triangle or the wedge.

Fundamental analysis relies on financial information reported by the company whose stock is being analyzed. Ratios and metrics are created using the data which indicate how a company is performing compared to similar companies. Technical Analysis Quantitative and Qualitative Fundamental Analysis The problem with defining the word fundamentals is that it can cover anything related to the economic well-being of a company. They include numbers like revenue and profit, but they can also include anything from a company's market share to the quality of its management.

The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn't much different from well-known definitions: Quantitative: information that can be shown using numbers, figures, ratios, or formulas Qualitative: rather than a quantity of something, it is its quality, standard, or nature In this context, quantitative fundamentals are hard numbers.

They are the measurable characteristics of a business. That's why the biggest source of quantitative data is financial statements. Revenue, profit, assets, and more can be accurately measured. The qualitative fundamentals are less tangible. They might include the quality of a company's key executives, brand-name recognition, patents , and proprietary technology. Neither qualitative nor quantitative analysis is inherently better. Many analysts consider them together. Qualitative Fundamentals to Consider There are four key fundamentals that analysts always consider when regarding a company.

All are qualitative rather than quantitative. They include: The Business Model What exactly does the company do? This isn't as straightforward as it seems. If a company's business model is based on selling fast-food chicken, is it making its money that way? Or is it just coasting on royalty and franchise fees? Competitive Advantage A company's long-term success is primarily driven by its ability to maintain a competitive advantage—and keep it.

Powerful competitive advantages, such as Coca-Cola's brand name and Microsoft's domination of the personal computer operating system, create a moat around a business allowing it to keep competitors at bay and enjoy growth and profits. When a company can achieve a competitive advantage, its shareholders can be well rewarded for decades.

Management Some believe management is the most important criterion for investing in a company. It makes sense: Even the best business model is doomed if the company's leaders fail to execute the plan properly. While it's hard for retail investors to meet and truly evaluate managers, you can look at the corporate website and check the resumes of the top brass and the board members.

How well did they perform in previous jobs? Have they been unloading a lot of their stock shares lately? Corporate Governance Corporate governance describes the policies in place within an organization denoting the relationships and responsibilities between management, directors, and stakeholders. These policies are defined and determined in the company charter , its bylaws, and corporate laws and regulations.

You want to do business with a company that is run ethically, fairly, transparently, and efficiently. Particularly note whether management respects shareholder rights and shareholder interests. Make sure their communications to shareholders are transparent, clear, and understandable.

If you don't get it, it's probably because they don't want you to. Industry It's also important to consider a company's industry: its customer base, market share among firms, industry-wide growth, competition, regulation, and business cycles.

Learning how the industry works will give an investor a deeper understanding of a company's financial health. Quantitative Fundamentals to Consider: Financial Statements Financial statements are the medium by which a company discloses information concerning its financial performance. Followers of fundamental analysis use quantitative information from financial statements to make investment decisions.

The three most important financial statements are income statements , balance sheets , and cash flow statements. The Balance Sheet The balance sheet represents a record of a company's assets, liabilities, and equity at a particular point in time. This includes items such as cash, inventory, machinery, and buildings. The other side of the equation represents the total financing value the company has used to acquire those assets.

Financing comes as a result of liabilities or equity. Liabilities represent debts or obligations that must be paid. Since he has been at SWOV researching the statistical and methodological aspects of road safety research in general, and time series analysis of developments in road safety in particular.

His research interests are Procrustes analysis; Multidimensional scaling; Distance-based multivariate analysis; Statistical analysis of time series; Forecasting. He has published in international journals in psychometrics and chemometrics. His research interests are Statistical analysis of time series; Theoretical and applied time series econometrics; Financial econometrics; Simulation methods; Kalman filtering and smoothing; Forecasting.

He has published in many international journals in statistics and econometrics. Also of Interest.

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The most interesting feature of state space analysis is that the state variable we choose for describing the system need not be physical quantities related to the system. Variables that are not related to the physical quantities associated with the system can be also selected as the state variables.

Even variables that are immeasurable or unobservable can be selected as state variables. Advantages of state variable analysis. It can be applied to non linear system. It can be applied to tile invariant systems. It can be applied to multiple input multiple output systems. Its gives idea about the internal state of the system. State of a dynamic system. State variable is a set of variables which fully describes a dynamic system at a given instant of time. Consider a system having a inputs, b outputs and c state variables.

Xc t Then the system can be represented as shown below. State Variable: The state variables are one of the sets of state variables or system variables that represent the whole system at any given period. The state variables that are required to represent a given system are n and are equal to the order of the system that is defining the differential equation. In the case of transfer function, it is first reduced to proper fraction, then the denominator of the fraction denotes the minimum number of state variables that are required to represent a given system.

State Vector: State Vector is a vector in which state variables are represented as elements. There are many mathematical models from which we can define the state-space model. Those are the transfer function model and differential equation model. We can define the model from any of the two existing models. Stability: This is one of the important and basic properties of state-space models. In General, in any state-space model, we can define the stability of the system using the eigenvalues of the state-space matrix A.

If all the eigenvalues are negative, then we can say that the system is stable. If any of the eigenvalues are positive, then the system becomes unstable. Example of State-Space Model by direct derivation Mechanical Translating Consider the example shown below and derive a state-apace model for the below-shown figure.

The input here is fa and the output is y. Here, the energy-storing elements are the spring k2, the spring k1, and mass m. So our state variables will be x and y. Based on some considerable initial values we can estimate the values of the system. More accurate than transfer function techniques. We mostly consider differential function techniques to estimate the values of the system, but the result obtained when the transfer function technique is used are considered to be more accurate than the results obtained when the differential function technique is used.

Analysis of multi-input and multi-output systems is made easy by using the state-space model. In the case of the transfer function, when there is single input and single output we can take the Laplace transform of input and the output and get the result. But, when there are multiple inputs and multiple outputs we cannot perform the same process on it. Since we have a state vector in our state-space model, we can represent all our input and output variables in the vector form and operate to get the desired output for the system.