Forecasting Nonlinear Functions of Returns Using LINEX Loss Functions |
Soosung Hwang |
John Knight |
and Stephen E. Satchell |
This paper applies LINEX loss functions to forecasting nonlinear functions of variance. We derive the optimal one-step-ahead LINEX forecast for various volatility models using data transformations such as $ln(y_{t}^{2})$ where $% y_{t}$ is the return of the asset. Our results suggest that the LINEX loss function is particularly well-suited to many of these forecasting problems and can give better forecasts than conventional loss functions such as mean square error (MSE). |
Key Words: LINEX Loss Function; Forecasting, Volatility. |
JEL Classification Numbers: C22, C53.. |