IDEAS home Printed from https://ideas.repec.org/p/sce/scecf9/951.html
   My bibliography  Save this paper

Nonparametric Modeling of Stock Returns Constrained by a Model of the Financial-Real Interaction

Author

Listed:
  • Peter Woehrmann

    (University of Bielefeld)

  • Willi Semmler

    (University of Bielefeld)

Abstract

Inspired by findings of nonlinearities and the Theorem of Takens (1981), forecasting models of financial time series are often built upon nonlinear univariate relationships. Empirical investigations, however, are seriously contaminated by the problem of overfitting, in particular in the presence of short and noisy time series, resulting in a gap between the degree of approximation and out-of-sample performance. Since the theory of statistical model selection is not well understood in the nonlinear case, this paper takes an alternative approach by putting economic constraints on the nonlinear dynamical system to be estimated. To be concrete, we restrict a univariate nonparametric forecasting model of stock returns, implemented via the Local Linear Maps of Ritter, Martinetz and Schulten (1990), to a discretized form of a continuous-time generalized Blanchard (1981) model of the financial-real interaction by Semmler, Chiarella and Mittnik (1998). This is performed by the method of penalty terms -- in the case of several constraints, algorithms developed by Abu-Mostafa (1990) may be appropriate. Empirical results for monthly U.S. data show that the wedge between the approximation and the out-of-sample performance is reduced.

Suggested Citation

  • Peter Woehrmann & Willi Semmler, 1999. "Nonparametric Modeling of Stock Returns Constrained by a Model of the Financial-Real Interaction," Computing in Economics and Finance 1999 951, Society for Computational Economics.
  • Handle: RePEc:sce:scecf9:951
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf9:951. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/sceeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.