Why financial markets do not use econometric forecasting: foreign exchange exotics, central banks and position taking

Clients and market practitioners act based on very different sets of information. It is natural for a client to use the Wiener-Kolmogorov prediction theory. Market makers are different. They also use econometric forecasting. But these are not standard econometric forecasting techniques. The practiti...

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Bibliographic Details
Published in:The Manchester school 2007-01, Vol.75 (Supp.), p.1-20
Main Author: Neftci, Salih N
Format: Article
Language:English
Subjects:
Bayesian method
Capital market
Econometric models
Economic forecasts
Financial information
Information economics
Information theory
Mathematical finance
Online Access:Get full text
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Summary:Clients and market practitioners act based on very different sets of information. It is natural for a client to use the Wiener-Kolmogorov prediction theory. Market makers are different. They also use econometric forecasting. But these are not standard econometric forecasting techniques. The practitioner has to take into account various levels or barriers known to exist in the short run. In this paper, we argue that the presence of such levels changes the classical forecasting problem into a Bayesian one. Reprinted by permission of Blackwell Publishers
ISSN:1463-6786