Risk Neutral Forecasting

Spyros Skouras ()

No 50, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: A notion of forecast quality is defined that is appropriate when returns forecasts are used in a simple investment decision. The relation between the conditional distribution of returns and optimal point forecasts for a risk neutral investor is characterised and it is shown that the conditional mean is a small subset of optimal forecasts. Taking into account potential model misspecification and the structure of the set of optimal forecasts, methods for developing specifically `risk neutral forecasting' models are proposed. Estimation by Empirical Risk Minimisation is shown to converge to parameters associated with optimal decisions and simulations suggest that performance in small samples is acceptable even in unfavourable circumstances. Usefulness of the proposed methods is illustrated with an empirical application in which they dominate popular alternatives.

Keywords: financial decision-making; empirical risk minimisation (search for similar items in EconPapers)
JEL-codes: C14 C44 G11 (search for similar items in EconPapers)
Date: 2001-04-01
New Economics Papers: this item is included in nep-ecm and nep-fin
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: RISK NEUTRAL FORECASTING (2000)
Working Paper: Risk Neutral Forecasting (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf1:50

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