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Forecasting Nonlinear Functions of Returns Using LINEX Loss Functions

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Author Info

  • Soosung Hwang

    (Department of Banking and Finance, City University Business School)

  • John Knight

    (Department of Economics, University of Western Ontario)

  • Stephen E. Satchell

    (Trinity College and Faculty of Economics and Politics, University of Cambridge)

Abstract

This paper applies LINEX loss functions to forecasting nonlinear functions of variance. We derive the optimal one-step-ahead LINEX forecast for various volatility models using data transformations such as ln(y2t) where yt is the return of the asset. Our results suggest that the LINEX loss function is particularly well-suited to many of these forecasting problems and can give better forecasts than conventional loss functions such as mean square error (MSE).

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File URL: http://www.aeconf.net/Articles/May2001/aef020109.pdf
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File URL: http://down.aefweb.net/AefArticles/aef020109.pdf
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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 2 (2001)
Issue (Month): 1 (May)
Pages: 187-213

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Handle: RePEc:cuf:journl:y:2001:v:2:i:1:p:187-213

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Related research

Keywords: LINEX Loss Function; Forecasting; Volatility;

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Cited by:
  1. Soosung Hwang & Steve Satchell, 2005. "GARCH model with cross-sectional volatility: GARCHX models," Applied Financial Economics, Taylor & Francis Journals, vol. 15(3), pages 203-216.
  2. Marcella Niglio, 2007. "Multi-step forecasts from threshold ARMA models using asymmetric loss functions," Statistical Methods and Applications, Springer, vol. 16(3), pages 395-410, November.
  3. Christodoulakis, George A., 2005. "Financial forecasts in the presence of asymmetric loss aversion, skewness and excess kurtosis," Finance Research Letters, Elsevier, vol. 2(4), pages 227-233, December.
  4. Stanislav Anatolyev, 2006. "Dynamic modeling under linear-exponential loss," Working Papers w0092, Center for Economic and Financial Research (CEFIR).
  5. Anatolyev, Stanislav, 2006. "Kernel estimation under linear-exponential loss," Economics Letters, Elsevier, vol. 91(1), pages 39-43, April.

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