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Decision‐Based Forecast Evaluation of UK Interest Rate Predictability
Author(s) -
Sirichand Kavita,
Hall Stephen G.
Publication year - 2016
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.2369
Subject(s) - predictability , treasury , context (archaeology) , econometrics , portfolio , bond , economics , interest rate , investment decisions , investment (military) , asset allocation , investment strategy , computer science , actuarial science , financial economics , statistics , finance , mathematics , behavioral economics , paleontology , archaeology , biology , politics , political science , market liquidity , law , history
This paper illustrates the importance of density forecasting and forecast evaluation in portfolio decision making. The decision‐making environment is fully described for an investor seeking to optimally allocate her portfolio between long and short Treasury bills, over investment horizons of up to 2 years. We examine the impact of parameter uncertainty and predictability in bond returns on the investor's allocation and we describe how the forecasts are computed and used in this context. Both statistical and decision‐based criteria are used to assess the predictability of returns. Our results show sensitivity to the evaluation criterion used and, in the context of investment decision making under an economic value criterion, we find some potential gain for the investor from assuming predictability. Copyright © 2015 John Wiley & Sons, Ltd.