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Comparing and evaluating Bayesian predictive distributions of assets returns

Author

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  • Amisano, Gianni
  • Geweke, John

Abstract

Bayesian inference in a time series model provides exact, out-of-sample predictive distributions that fully and coherently incorporate parameter uncertainty. This study compares and evaluates Bayesian predictive distributions from alternative models, using as an illustration five alternative models of asset returns applied to daily S&P 500 returns from 1976 through 2005. The comparison exercise uses predictive likelihoods and is inherently Bayesian. The evaluation exercise uses the probability integral transform and is inherently frequentist. The illustration shows that the two approaches can be complementary, each identifying strengths and weaknesses in models that are not evident using the other. JEL Classification: C11, C53

Suggested Citation

  • Amisano, Gianni & Geweke, John, 2008. "Comparing and evaluating Bayesian predictive distributions of assets returns," Working Paper Series 969, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2008969
    Note: 337895
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    References listed on IDEAS

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    More about this item

    Keywords

    forecasting; GARCH; inverse probability transform; Markov mixture; predictive likelihood; S&P 500 returns; stochastic volatility.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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