A decision-based approach to econometric modelling

In many applications it is necessary to use a simple and therefore highly misspecified econometric model as the basis for decision-making. We propose an approach to developing a possibly misspecified econometric model that will be used as the beliefs of an expected utility maximiser. An objective function that measures the value of predictive distributions in decision-making is introduced and used in estimation, selection and evaluation of parametric or semiparametric models. The methods proposed also provide an econometric approach for developing arbitrary parametric action rules such as technical trading rules. The approach is compared in detail with existing methods and is applied in the context of a CARA investor’s decision problem where analytical, simulation and empirical results suggest it is very effective.

[1]  B. LeBaron,et al.  Simple Technical Trading Rules and the Stochastic Properties of Stock Returns , 1992 .

[2]  Gordon Leitch,et al.  Economic Forecast Evaluation: Profits versus the Conventional Error Measures , 1991 .

[3]  Pierluigi Balduzzi,et al.  Transaction costs and predictability: some utility cost calculations , 1999 .

[4]  F. Diebold,et al.  Comparing Predictive Accuracy , 1994, Business Cycles.

[5]  Clive W. J. Granger.  Prediction with a generalized cost of error function , 2001 .

[6]  Christian Gourieroux,et al.  Statistics and econometric models , 1995 .

[7]  K. West,et al.  A Utility Based Comparison of Some Models of Exchange Rate Volatility , 1992 .

[8]  Spyros Skouras,et al.  Decisionmetrics: A Decision-Based Approach to Econometric Modelling , 2007 .

[9]  Howard Raiffa,et al.  Applied Statistical Decision Theory. , 1961 .

[10]  H. White,et al.  Data‐Snooping, Technical Trading Rule Performance, and the Bootstrap , 1999 .

[11]  M. Kendall.  Theoretical Statistics , 1956, Nature.

[12]  R. Redner.  Note on the Consistency of the Maximum Likelihood Estimate for Nonidentifiable Distributions , 1981 .

[13]  Andrew A. Weiss,et al.  Estimating Time Series Models Using the Relevant Cost Function , 1996 .

[14]  Michael W. Brandt.  Estimating Portfolio and Consumption Choice: A Conditional Euler Equations Approach , 1999 .

[15]  Pedro Santa-Clara,et al.  Anderson Graduate School of Management – Finance Uc Los Angeles Title: Dynamic Portfolio Selection by Augmenting the Asset Space Dynamic Portfolio Selection by Augmenting the Asset Space * , 2022 .

[16]  Michael W. Brandt,et al.  Variable Selection for Portfolio Choice , 2001 .

[17]  Stephen J. Brown,et al.  Estimation risk and optimal portfolio choice , 1980 .

[18]  Spyros Skouras,et al.  Financial returns and efficiency as seen by an artificial technical analyst , 2001 .

[19]  Halbert White,et al.  Estimation, inference, and specification analysis , 1996 .