JSM 2005 - Toronto

Abstract #304720

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Activity Number: 139
Type: Contributed
Date/Time: Monday, August 8, 2005 : 10:30 AM to 12:20 PM
Sponsor: Business and Economics Statistics Section
Abstract - #304720
Title: Optimal Prediction Under Linex Loss: A Monte Carlo Study
Author(s): Yasemin (Uu) Bardakci*+
Companies: American University of Beirut
Address: Department of Economics, Beirut, 1107-2020, Lebanon
Keywords: time varying volatility ; asymmetric loss ; optimal predictor ; GARCH ; monte carlo
Abstract:

Using Monte Carlo Simulation, I compare the forecasts of returns from the optimal predictor (conditional mean predictor) for a symmetric quadratic loss function (MSE) with the pseudo-optimal predictor and optimal predictor for an asymmetric loss function under the assumption that agents have asymmetric loss functions. In particular, I use the LINEX asymmetric loss function with different degrees of asymmetry. I generate GARCH(1,1) processes with different persistence levels, both with normal and t-distributed errors. The results strongly suggest not to use the conditional mean predictor when agents have any kind of asymmetry. However, the reduction in mean loss by using the optimal versus the pseudo-optimal predictor depends on the degree of asymmetry and the persistence parameters being used.

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