Decisionmetrics: A Decision-Based Approach to Econometric Modelling

SFI Working Paper No. 01-10-64

42 Pages Posted: 28 Nov 2001

See all articles by Spyros Skouras

Spyros Skouras

Athens University of Economics and Business - Department of International and European Economic Studies

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 quasi-likelihood 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.

Keywords: Decision theory, econometric modelling, financial decision-making

JEL Classification: C44, C50, G11

Suggested Citation

Skouras, Spyros, Decisionmetrics: A Decision-Based Approach to Econometric Modelling. SFI Working Paper No. 01-10-64, Available at SSRN: https://ssrn.com/abstract=291921 or http://dx.doi.org/10.2139/ssrn.291921

Spyros Skouras (Contact Author)

Athens University of Economics and Business - Department of International and European Economic Studies ( email )

GR-10434 Athens
Greece