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Forecasting Nonlinear Functions of Returns Using LINEX Loss Functions

Author

Listed:
  • 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).

Suggested Citation

  • Soosung Hwang & John Knight & Stephen E. Satchell, 2001. "Forecasting Nonlinear Functions of Returns Using LINEX Loss Functions," Annals of Economics and Finance, Society for AEF, vol. 2(1), pages 187-213, May.
    • Handle: RePEc:cuf:journl:y:2001:v:2:i:1:p:187-213
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    Citations

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    Cited by:

    1. Mike G. Tsionas, 2023. "Linex and double-linex regression for parameter estimation and forecasting," Annals of Operations Research, Springer, vol. 323(1), pages 229-245, April.
    2. 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.
    3. Hansen, Peter Reinhard & Dumitrescu, Elena-Ivona, 2022. "How should parameter estimation be tailored to the objective?," Journal of Econometrics, Elsevier, vol. 230(2), pages 535-558.
    4. Anatolyev, Stanislav, 2009. "Dynamic modeling under linear-exponential loss," Economic Modelling, Elsevier, vol. 26(1), pages 82-89, January.
    5. Anatolyev, Stanislav, 2006. "Kernel estimation under linear-exponential loss," Economics Letters, Elsevier, vol. 91(1), pages 39-43, April.
    6. Marcella Niglio, 2007. "Multi-step forecasts from threshold ARMA models using asymmetric loss functions," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 16(3), pages 395-410, November.

    More about this item

    Keywords

    LINEX Loss Function; Forecasting; Volatility;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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