Stochastic Models

Introduction to R

Walt Pohl
Universität Zürich
Department of Business Administration

February 28, 2013

What is R?

R is a freely-available general-purpose statistical package,

developed by a team of volunters on the Internet.
It is widely used among statisticians, and frequently new
statistical techniques are first implemented in R.
It is less widely-used by economists, who tend to prefer
commercial statistical packages or Matlab.

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R versus Excel
R has many more probability and statistical
functions built in or avaiable in free packages.
R is command-driven. You enter a sequence of
commands to manipulate your data.
While everything in Excel is in terms of cells, R has
a bunch of different data types: vectors, arrays,
objects. You can define your own.
Normally you will create a “.R” command file that
is separate from your data.
Note: Excel also has a separate command language –
VBA.
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R versus Matlab

The real target audience for Matlab is engineers.

Matlab has many features useful for engineers but
not useful for us.
The target application for R is statistics. R has
many more statistical functions than Matlab.
Matlab started as a package for manipulating
matrices, and added other features later.
Non-matrix based operations are awkward.
R was designed for general-purpose programming
from the beginning.

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R versus Other Statistics Programs

R is free.
R is more command-driven and less GUI driven.
R is very close to S-Plus.
R supports as broad of an array of operations as any
other statistics program.
R’s programming language is better-designed than
most of its competitors.
Since different packages are written by different
volunteers, R is not as uniform as some other
systems.

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Important URLs

R home page – http://www.r-project.org/

Closest R mirror site – http://stat.ethz.ch/CRAN/
R tutorial –
http://cran.r-project.org/doc/manuals/R-intro.html

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Monte Carlo Simulation in R
R has many, built-in probability distributions. For each
supported distribution XXX, R comes with four functions:
dXXX – density function
pXXX – cumulative distribution function
qXXX – quantile function (inverse of the CDF)
rXXX – random draw
XXX = unif, norm, chisq, t, etc.
Example: For the normal distribution, we have dnorm,
pnorm, qnorm, rnorm.

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Vectors in R

For us, the basic R datatype is a vector of numbers.

The c command creates vectors:
Example: If you type c(1, 3, 4.5), R returns the vector
(1, 3, 4.5).
You can assign vectors to variables, using the < −
operator.
x < − c(1, 3, 4.5);

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Vectors in R, cont’d

You can get the value of individual entries by using the []

operator.
x[3] will return 4.5.
You can also get subvectors by using ranges.
x[1:2] will return the vector 1, 3.
The length function allows you to refer to the end in a
range:
x[2:length(x)] will return the vector 3, 4.5.

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Operations on Vectors

Where possible, any operation on vectors will be applied

elementwise.
So if x and y are two vectors, then z = x * y will be the
vector where z[i] = x[i] * y[i].
Likewise log(x) will be the vector whose each entry will
be log(x[i]), etc.

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Sample Statistics

R has built-in functions for the usual sample statistics:

mean(x) – Mean of vector x
var(x) – Variance of vector x
sd(x) – Standard Deviation of vector x
quantile(x, q) – The q-th quantile of vector x.

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Reading Data

The easiest way to import data into R is through CSV

files. Excel can export files in this format.
The function read.csv imports a file as a CSV file.
Example: apple < − read.csv(”apple.csv”) imports the
file named ”apple.csv” into the variable apple. The data
is returned in the form of a data frame.

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Data frames

A data frame is a named list of vectors. In the case of

”apple.csv”, we get four entries on the list:
DATE – end date of month.
RET – monthly return on Apple stock.
VWRETD – monthly return on CRSP
value-weighted index.
rf – monthly risk-free rate.
You access the vector by using $. Example: apple$RET.

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Regression

R has a very easy to use interface for regression: the lm

function. For example, to fit the CAPM for Apple, we
would use
lm(RET ∼ VWRETD, data=apple)
The first argument uses the tilde operator indicate
that we want to regress RET on VWRETD.
The second argument indicates that the data comes
from the apple frame.

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Regression cont’d

lm by itself only returns the coefficients. To get more

detail, including t stats, use
summary(lm(RET ∼ VWRETD, data=apple))

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Built-In Mathematical Functions

R has various built-in mathematical functions:

exp(x) – e x .
log(x) – natural logarithm, log x. (Use log(x, b) for
logb x).
xˆy – x y .
√
sqrt(x) – x
Note these all work on vectors. exp(c(1, 2)) gives you
c(2.718282, 7.389056).

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Special Mathematical Values

Floating point supports some special values

1/0 = Inf.
−1/0 = -Inf.
0/0 = NaN.
Mathematical operations are defined for these special
values. For example, Inf + Inf = Inf, and Inf - Inf = NaN.

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Defining Your Own Functions

You can define a function by using R’s function

command:
f < − function(x) xˆ2
This creates a function that squares its argument, and
assigns it to the variable f. Calling f(2) in R will return 4.
Functions can take vector arguments. So f(c(1, 2)) will
return c(1, 4).

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Matrices

R also supports matrices. Use matrix(0, nrow=m,

ncol=n) to create an m-by-n matrix. For example
g = matrix(0, nrow = 3, ncol = 4);
To access the element in the i-th row and j-th column,
use [] with two numbers. For example
g[1,2] < − 3;
assigns 3 to gi,j .

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Logical Operations

R has the following basic logical operations.

==: equality
!−: not equal
<, >: greater or less than
<=, >=: greater/less than or equal
They evaluate to TRUE or FALSE.

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Logical Operations on Vectors

Logical operations work on vector arguments, and return

a vector of TRUE or FALSE values.
Example: 1:10 > 5.
You can use the functions any or all to see if any or all of
the entries in the vector are TRUE.

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Control Structures

R supports the standard control structures found in most

programming languages:
Branching: if
Definite iteration: for
Indefinite iteration: while

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Control Structures: If

A statement like “if test code1 else code2 ’ executes

code1 if the test is true, and code2 if the test is false.
(“else code2 can be missing, means to do nothing).
Example: if (0 == 0) print(“is zero”) else print(“is not
zero”).

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Control Structures: For

For allows you to do something a fixed number of times:

Example: for (i in 1:10) print(i);

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Control Structures: While

While allows you to do something until a condition

becomes TRUE. (It may take forever).
Example:
i = 10;
while (i>0) {
print(i);
i = i - 1;
}
(Notice the use of braces here. This is because the body
of the while loop contains multiple statements.)

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Writing Fast R Code

R is faster for vector operations than for loops.

Example: x < − (1:1000)2
is faster than
x < − rep(0, 1000); # create an array of all zeros.
for (i in 1:1000) {
x[i] < − iˆ2;
}

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