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How to pick up Vector Autoregression Factor? Return or Price?

Posted: December 11th, 2015, 8:17 am
by EdisonCruise
I am making a VAR model to forcast future price. The factors include other commodity price, interest rate, FX rate, commodity storage and so on.I find most literature uses asset return as VAR input factors, but my back test result shows that if I directly use prices as input, the result looks much better.So, is there any principle to pick up VAR factors here? Or just by try and error.Thank you in advance.

How to pick up Vector Autoregression Factor? Return or Price?

Posted: December 14th, 2015, 5:40 pm
by mtsm
This is a fairly complicated question. A lot of empirical modelling work deals exclusively with differentiated, demeaned or preprocessed in some way time series (such as returns). The level series just don't have the right statistical properties to pipe into most statistical models. If you do use price series, then you normally need to operate with a lot longer data horizons in general. But this isn't a sufficient remark, you would need to research this much more thoroughly.

How to pick up Vector Autoregression Factor? Return or Price?

Posted: December 17th, 2015, 8:55 am
by EdisonCruise
OK. Thank you. I think I have to try to make it.