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Model uncertainty in financial forecasting

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  • Matthias J. Feiler
  • Thibaut Ajdler

Abstract

Models necessarily capture only parts of a reality. Prediction models aim at capturing a future reality. In this paper we address the question of how the future is constructed (or: imagined) in an investment context where market participants form expectations on the returns of a risky investment. We observe that the participants' model choices are subject to unforeseeable change. The objective of the paper is to demonstrate that the resulting uncertainty may be reduced by incorporating relations among competing models in the estimation process.

Suggested Citation

  • Matthias J. Feiler & Thibaut Ajdler, 2019. "Model uncertainty in financial forecasting," Papers 1912.10813, arXiv.org.
    • Handle: RePEc:arx:papers:1912.10813
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    References listed on IDEAS

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    1. Roman Frydman & Soren Johansen & Anders Rahbek & Morten Tabor, 2019. "The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth`s Consistency Constraint in Modeling Aggregate Outcomes," Working Papers Series 92, Institute for New Economic Thinking.
    2. Matthias Feiler & Thibaut Ajdler, 2019. "Learning from Others in the Financial Market," Papers 1906.03201, arXiv.org, revised Aug 2019.
    3. Roman Frydman & Soeren Johansen & Anders Rahbek & Morten Nyboe Tabor, 2019. "The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth�s Consistency Constraint in Modeling Aggregate Outcomes," Discussion Papers 19-02, University of Copenhagen. Department of Economics.
    4. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
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