Forecasting trends with asset prices

Abstract

The question of interest in this paper is the estimation of the trend of a financial asset, and the impact of its misspecification on investment strategies. The setting we consider is that of a stochastic asset price model where the trend follows an unobservable Ornstein–Uhlenbeck process. Motivated by the use of Kalman filtering as a forecasting tool, we address the problem of parameter estimation, and measure the effect of parameter misspecification. Numerical examples illustrate the difficulty of trend forecasting in financial time series.

Keywords:

• Trend estimation
• Investment strategies
• Kalman filter
• Ornstein–Uhlenbeck process

JEL Classification:

• C
• C3

Notes

No potential conflict of interest was reported by the authors.