2017/11/15 by Stanislav Anatolyev, Anatolyev, Stanislav, Jozef Baruník +1
Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #FOS: Economics and business #Financial Markets and Investment Strategies #Financial Risk and Volatility Modeling #Statistical Finance (q-fin.ST) #Trading and Market Microstructure (q-fin.TR)
paper · pdf · doi:10.48550/arxiv.1711.05681
openalex publication_date 2017/11/15 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We present a simple approach to forecasting conditional probability distributions of asset returns. We work with a parsimonious specification of ordered binary choice regression that imposes a connection on sign predictability across different quantiles. The model forecasts the future conditional probability distributions of returns quite precisely when using a past indicator and past volatility proxy as predictors. Direct benefits of the model are revealed in an empirical application to the 29 most liquid U.S. stocks. The forecast probability distribution is translated to significant economic gains in a simple trading strategy. Our approach can also be useful in many other applications where conditional distribution forecasts are desired.