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Prediction in Econometrics: Towards Mathematical Justification of Simple (and Successful) Heuristics
Vladik Kreinovich, University of Texas at El PasoFollow Hung T. Nguyen, New Mexico State University - Main CampusFollow Songsak Sriboonchitta, Chiang Mai University
8-2011
Technical Report: UTEP-CS-11-46
Published in Proceedings of the Fifth International Conference of the Thailand Econometric Society, Chiang Mai, Thailand, January 12-13, 2012.
Many heuristic and semi-heuristic methods have been proposed to predict economic and financial processes. Some of these heuristic processes are intuitively reasonable, some seemingly contradict to our intuition. The success of these heuristics leads to a reasonable conjecture that these heuristic methods must have a more fundamental justification. In this paper, we provide such a justification for two simple (and successful) prediction heuristics: of an intuitive exponential smoothing that provides a reasonable prediction for slowly changing processes, and of a seemingly counter-intuitive idea of an increase in volatility as a predictor of trend reversal. As a possible application of these ideas, we consider a new explanation of the price transmission phenomenon.
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Technical Report: UTEP-CS-11-46
Published in Proceedings of the Fifth International Conference of the Thailand Econometric Society, Chiang Mai, Thailand, January 12-13, 2012.