Prediction with a Generalized Cost of Error Function |
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Authors: | C. W. J. Granger |
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Affiliation: | 1.University of Nottingham, |
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Abstract: | Classical prediction theory limits itself to quadratic cost functions, and hence least-square predictors. However, the cost functions that arise in practice in economics and management situations are not likely to be quadratic in form, and frequently will be non-symmetric. It is the object of this paper to throw light on prediction in such situations and to suggest some practical implications. It is suggested that a useful, although sub-optimal, manner of taking into account generalized cost functions is to add a constant bias term to the predictor. Two theorems are proved showing that under fairly general conditions the bias term can be taken to be zero when one uses a symmetric cost function. If the cost function is a non-symmetric linear function, an expression for the bias can be simply obtained. |
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