Predictive Modeling of Asset Classes: Probability Density Function Shapes
This post discusses and suggests the use of suitable models based on the shape and properties of a Probability Density Function (PDF). Data on the following ETFS (SPDR=SP500, IEF=10yr Treasury Yield, DBC=Commodities, DXY=USD, GLD=Gold) as at 4 June 2025. The chart above shows the shape of the PDF of each asset class. A summary of the properties and/or implications of each asset class’ PDF from the perspective of constructing predictive models. DXY The DXY distribution is relatively symmetric and centered, with moderate tails. This suggests that standard linear models and time series models assuming normality may perform adequately. Outliers are less likely, so models will be less sensitive to extreme values, and regularization may not be as critical. SP500 The SP500 distribution is sharply peaked and slightly left-skewed, indicating frequent small changes and occasional larger negative moves. Predictive models should account for potential negative out...