NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Prediction Under Asymmetric Loss

Peter F. Christoffersen, Francis X. Diebold

NBER Technical Working Paper No. 167
Issued in October 1994
NBER Program(s):   EFG   CF

Prediction problems involving asymmetric loss functions arise routinely in many fields, yet the theory of optimal prediction under asymmetric loss is not well developed. We study the optimal prediction problem under general loss structures and characterize the optimal predictor. We compute the optimal predictor analytically in two leading cases. Analytic solutions for the optimal predictor are not available in more complicated cases, so we develop numerical procedures for computing it. We illustrate the results by forecasting the GARCH(1,1) process which, although white noise, is non-trivially forecastable under asymmetric loss.

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Document Object Identifier (DOI): 10.3386/t0167

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