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Decisionmetrics: a decision-based approach to econometric modelling (2007)
| Venue: | Journal of Econometrics |
| Citations: | 22 - 0 self |
BibTeX
@ARTICLE{Skouras07decisionmetrics:a,
author = {Spyros Skouras and Jel C and Doyne Farmer and Søren Johansen and Shareen Joshi and Steve Satchell},
title = {Decisionmetrics: a decision-based approach to econometric modelling},
journal = {Journal of Econometrics},
year = {2007},
pages = {414--440}
}
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Abstract
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 objective expected utility maximiser. A discrepancy between model and ‘truth ’ is introduced that is interpretable as a measure of the model’s value for this decision-maker. Our decision-based approach utilises this discrepancy in estimation, selection, inference and evaluation of parametric or semiparametric models. The methods proposed nest quasilikelihood methods as a special case that arises when model value is measured by the Kullback-Leibler information discrepancy and also provide an econometric approach for developing parametric decision rules (e.g. technical trading rules) with desirable properties. The approach is illustrated and applied in the context of a CARA investor’s decision problem for which analytical, simulation and empirical results suggest it is very effective.
Keyphrases
decision-based approach cara investor decision problem special case parametric decision rule many application semiparametric model quasilikelihood method model value econometric model desirable property utility maximiser empirical result kullback-leibler information discrepancy misspecified econometric model technical trading rule econometric approach
