Forecasting trends with asset prices

Ahmed Bel Hadj Ayed, Grégoire Loeper and Frédéric Abergel

Quantitative Finance, 2017, vol. 17, issue 3, 369-382

Abstract: The question of interest in this paper is the estimation of the trend of a financial asset, and the impact of its misspecification on investment strategies. The setting we consider is that of a stochastic asset price model where the trend follows an unobservable Ornstein–Uhlenbeck process. Motivated by the use of Kalman filtering as a forecasting tool, we address the problem of parameter estimation, and measure the effect of parameter misspecification. Numerical examples illustrate the difficulty of trend forecasting in financial time series.

Date: 2017
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DOI: 10.1080/14697688.2016.1206959

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