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Annual Review of Financial Economics

Volume 10, 2018

Forecasting Methods in Finance

Abstract

Our review highlights some of the key challenges in financial forecasting problems and opportunities arising from the unique features of financial data. We analyze the difficulty of establishing predictability in an environment with a low signal-to-noise ratio, persistent predictors, and instability in predictive relations arising from competitive pressures and investors’ learning. We discuss approaches for forecasting the mean, variance, and probability distribution of asset returns. Finally, we discuss how to evaluate financial forecasts while accounting for the possibility that numerous forecasting models may have been considered, leading to concerns of data mining.

Keyword(s): forecast evaluation, JEL C53, JEL C58, JEL G17, market efficiency, model instability, out-of-sample forecasting, return predictability
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2018-11-01
2025-06-20
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