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Total Posts: 1561
Joined: Jun 2004
Posted: 2019-05-12 19:09
Here is a problem and, as usual, I am being stupid.

I am trying to predict an overnight interest rate in one of the emerging markets in several days (up to 5 weeks). There is a relatively large history of observations (say 5-6 thousand observations) and I found a few predictive models.

Model 1: reversion to the long-term mean - produces a forecast for time now + n

Model 2: short-term micro-reversion- produces forecast for tomorrow (now + 1)

Model 3: day of week seasonality - produces adjustment based on the day of the week

What I am trying to do now is merge these models into a single forecasting method. The problem is that (a) the models are not strictly independent and (b) I want to understand if I am getting an improvement (the base line is unchanged from todays rate).

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”


Total Posts: 1262
Joined: Feb 2005
Posted: 2019-05-13 11:43
wouldn't you just use some form of ensemble learning to combine the forecast?

Dilbert: Why does it seem as though I am the only honest guy on earth? Dogbert: Your type tends not to reproduce.


Total Posts: 468
Joined: May 2006
Posted: 2019-05-13 12:14

d Prediction = ShortTimeScale * (ShortTerm - Prediction) dt + dSeasonality + dW
d ShortTerm = LongTimeScale * (LongTerm - ShortTerm) dt + dZ


"There is a SIX am?" -- Arthur


Total Posts: 749
Joined: Jun 2005
Posted: 2019-05-13 14:41
Minimize Sum of error normalized by combined error prediction ~ R2.

pred_i (i=1,2) depends on model parameters.

R21 ~ abs(pred1-price)/err1
R22 ~ abs(pred2-price)/err2

R2 ~ [(pred1-price)^2+(pred2-price)^2]/[err1^2+err2^2]

R2 behaves well, i.e. it roughly follows Chi2.

You also can apply inverse-CDF transformations (it's also called PIT) and combine probabilities (using ML/NN?). Usually I check something like:

if 2*p-1 \in [-1,1]
then (p1+p2-1) \in [-1,1]

or something like...

PS. typos..


Total Posts: 22
Joined: Feb 2018
Posted: 2019-05-13 16:09
Could Fernholz with his hedged strategy from "Statistics of statistical arbitrage" be of any help?
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