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Decisionmetrics: A Decision-Based Approach to Econometric Modeling

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  • Spyros Skouras

Abstract

In many applications it is necessary to use a simple and therefore highly misspecified econometric model as the basis for decision-making. We propose an approach to developing a possibly misspecified econometric model that will be used as the beliefs of an objective expected utility maximiser. A discrepancy between model and ÔtruthÕ is introduced that is interpretable as a measure of the modelÕs value for this decision-maker. Our decision-based approach utilises this discrepancy in estimation, selection, inference and evaluation of parametric or semiparametric models. The methods proposed nest quasi-likelihood methods as a special case that arises when model value is measured by the Kullback-Leibler information discrepancy and also provide an econometric approach for developing parametric decision rules (e.g. technical trading rules) with desirable properties. The approach is illustrated and applied in the context of a CARA investorÕs decision problem for which analytical, simulation and empirical results suggest it is very effective.

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Bibliographic Info

Paper provided by Santa Fe Institute in its series Working Papers with number 01-11-064.

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Date of creation: Nov 2001
Date of revision:
Handle: RePEc:wop:safiwp:01-11-064

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Keywords: Decision theory; econometric modeling; financial decision-making;

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References

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  11. Chamberlain, Gary, 2000. "Econometrics and decision theory," Journal of Econometrics, Elsevier, vol. 95(2), pages 255-283, April.
  12. Spyros Skouras, 2001. "Decisionmetrics: A Decision-Based Approach to Econometric Modeling," Working Papers 01-11-064, Santa Fe Institute.
  13. Allan Timmermann & Halbert White & Ryan Sullivan, 1998. "Data-Snooping, Technical Trading, Rule Performance and the Bootstrap," FMG Discussion Papers dp303, Financial Markets Group.
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Citations

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Cited by:
  1. Bruce Mizrach, 2007. "Recovering Probabilistic Information From Options Prices and the Underlying," Departmental Working Papers 200702, Rutgers University, Department of Economics.
  2. Skouras, Spyros, 2007. "Decisionmetrics: A decision-based approach to econometric modelling," Journal of Econometrics, Elsevier, vol. 137(2), pages 414-440, April.
  3. Stanislav Anatolyev, 2006. "Dynamic modeling under linear-exponential loss," Working Papers w0092, Center for Economic and Financial Research (CEFIR).
  4. Bruce Mizrach, 2006. "The Enron Bankruptcy: When did the options market in Enron lose it’s smirk?," Review of Quantitative Finance and Accounting, Springer, vol. 27(4), pages 365-382, December.
  5. Allan Timmermann & Andrew Patton, 2004. "Properties of Optimal Forecasts under Asymmetric Loss and Nonlinearity," Working Papers wp04-05, Warwick Business School, Finance Group.
  6. Stefania D'Amico, 2005. "Density selection and combination under model ambiguity: an application to stock returns," Finance and Economics Discussion Series 2005-09, Board of Governors of the Federal Reserve System (U.S.).
  7. Gonzalez-Rivera, Gloria & Lee, Tae-Hwy & Mishra, Santosh, 2004. "Forecasting volatility: A reality check based on option pricing, utility function, value-at-risk, and predictive likelihood," International Journal of Forecasting, Elsevier, vol. 20(4), pages 629-645.
  8. Haas, Markus & Mittnik, Stefan & Mizrach, Bruce, 2006. "Assessing central bank credibility during the ERM crises: Comparing option and spot market-based forecasts," Journal of Financial Stability, Elsevier, vol. 2(1), pages 28-54, April.
  9. Halbert White & Karim Chalak, 2008. "Identifying Structural Effects in Nonseparable Systems Using Covariates," Boston College Working Papers in Economics 734, Boston College Department of Economics.
  10. Stanislav Anatolyev & Natalia Kryzhanovskaya, 2009. "Directional Prediction of Returns under Asymmetric Loss: Direct and Indirect Approaches," Working Papers w0136, Center for Economic and Financial Research (CEFIR).
  11. Allan Timmermann & Andrew J. Patton, 2004. "Properties of Optimal Forecasts," Econometric Society 2004 North American Winter Meetings 234, Econometric Society.
  12. Hansen, Peter Reinhard & Lunde, Asger, 2006. "Consistent ranking of volatility models," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 97-121.
  13. Alexander, Marcus & Christakis, Nicholas A., 2008. "Bias and asymmetric loss in expert forecasts: A study of physician prognostic behavior with respect to patient survival," Journal of Health Economics, Elsevier, vol. 27(4), pages 1095-1108, July.

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