Forecasting dynamic return distributions based on ordered binary choice

Stanislav Anatolyev and Jozef Baruník

International Journal of Forecasting, 2019, vol. 35, issue 3, 823-835

Abstract: We present a simple approach to the forecasting of conditional probability distributions of asset returns. We work with a parsimonious specification of ordered binary choice regressions that imposes a connection on sign predictability across different quantiles. The model forecasts the future conditional probability distributions of returns quite precisely when using a past indicator and a past volatility proxy as predictors. The direct benefits of the model are revealed in an empirical application to the 29 most liquid U.S. stocks. The forecast probability distribution is translated to significant economic gains in a simple trading strategy. Our approach can also be useful in many other applications in which conditional distribution forecasts are desired.

Keywords: Asset returns; Predictive distribution; Conditional probability; Probability forecasting; Ordered binary choice (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:35:y:2019:i:3:p:823-835

DOI: 10.1016/j.ijforecast.2019.01.005

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