Dynamic Modeling Under Linear-Exponential Loss
19 Pages Posted: 21 Nov 2006 Last revised: 17 Sep 2008
Date Written: April 17, 2008
We develop a methodology of parametric modeling of time series dynamics when the underlying loss function is linear-exponential (Linex). We propose to directly model the dynamics of the conditional expectation that determines the optimal predictor. The procedure hinges on the exponential quasi maximum likelihood interpretation of the Linex loss and nicely fits the multiple error modeling framework. Many conclusions relating to estimation, inference and forecasting follow from results already available in the econometric literature. The methodology is illustrated using data on United States GNP growth and Treasury bill returns.
Keywords: Linear-exponential loss, optimal predictor, quasi maximum likelihood, multiple error model, autoregressive conditional durations
JEL Classification: C22, C51, C52
Suggested Citation: Suggested Citation