Using lots of chalk to raise the RA

[remilard]

As for where the data John used to develop his model came from I have no idea. But I can give an example of the general technique I think he must have used which illustrates the idea and some of its pitfalls. At http://www.pbase.com/image/127869369 I've put picture of the Moody Baa bond rate plotted against the LIBOR (London Interbank Offering Rate) for the same period. There is definitely a correlation. The more interest the Brits charge the more we charge over here. But the correlation is not as strong as we might like. Historically you cannot look at the LIBOR and say what the Baa will be. With such a data set it is common to find the simplest model (a linear relationship) which best fits the data by minimizing the error between what the straight line predicts and what the actual data show. Graphically this means placing a straight edge through the data so that the dots appear to be about equally distributed on either side of the line. The straight line on the plot at the picture site is the best fit and it says the trend in Baa rate is such that the Baa is 0.332 times the LIBOR rate + 6.32%. Thus, if the LIBOR is 4%, the Baa would be distributed around 7.6%. But as the data show, when the LIBOR has been 4% the Baa has been as low as 6% and as high as 9%. LIBOR is not a particularly good predictor of Baa and the number, on the plot, r = 0.586 is a measure of how good (or in this case, bad) it is. r= 1 would mean that every data point would fall right on the line. r=0 means that there is no correlation between the two variables at all.

I think if you subtracted observed credit spreads from the bond yields (eg fit LIBOR to treasuries) the fit would be much better. If only the f(SRM) = RA model were so easy to fix.

I remember the first time I made a stout with my RA=12 water by doughing in and intending to add chalk until the pH was within range as per my shiny new Hanna meter.

That was a pretty quick exercise.

That stout was the best dark beer I had ever made to that point, and the first with no chalk.

 

[Bobby_M]

I thought the ;-) was universally understood as the /sarcasm tag. I just wish the brains would get brewing science worked out for the mortals already.

 

[ajdelange]

I thought the ;-) was universally understood as the /sarcasm tag. I just wish the brains would get brewing science worked out for the mortals already.

I didn't know that but it doesn't matter because the implied question was not an unreasonable one.