Risk Neutral Forecasting
AbstractA notion of forecast quality is defined that is appropriate when returns forecasts are used in a simple investment decision. The relation between the conditional distribution of returns and optimal point forecasts for a risk neutral investor is characterised and it is shown that the conditional mean is a small subset of optimal forecasts. Taking into account potential model misspecification and the structure of the set of optimal forecasts, methods for developing specifically `risk neutral forecasting' models are proposed. Estimation by Empirical Risk Minimisation is shown to converge to parameters associated with optimal decisions and simulations suggest that performance in small samples is acceptable even in unfavourable circumstances. Usefulness of the proposed methods is illustrated with an empirical application in which they dominate popular alternatives.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 50.
Date of creation: 01 Apr 2001
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financial decision-making; empirical risk minimisation;
Other versions of this item:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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ERIM Report Series Research in Management
ERS-2003-052-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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