Forecasting with Distributional Scaling

5 Pages Posted: 26 Dec 2009

Date Written: December 24, 2009

Abstract

Option pricing and allocation tools in portfolio construction should be prospective - based on assumptions about how prices will change in the future. Most capital market assumptions used in portfolio construction are based on retrospective analysis, boiling down to simple calculations of historical correlations. A better method is to take advantage of the self-similarity of returns where tick-by-tick returns are scaled up to daily returns, or where daily returns are scaled up to monthly returns. Distributional scaling can be used for this purpose.

Keywords: self-similarity, fractals, multifractals, distributional scaling, forecasting, asset allocation, option pricing

JEL Classification: G00, G11, C53

Suggested Citation

Jacobsen, Brian, Forecasting with Distributional Scaling (December 24, 2009). Available at SSRN: https://ssrn.com/abstract=1528005 or http://dx.doi.org/10.2139/ssrn.1528005

Brian Jacobsen (Contact Author)

Allspring Global Investments ( email )

100 Heritage Reserve
Menomonee Falls, WI 53051
United States

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