negative weights
On 4/29/06, BBands <bbands at gmail.com> wrote:
On 4/28/06, Dirk Eddelbuettel <edd at debian.org> wrote:
Hm, you didn't mention forecasting. I am not even sure where weights would enter there...
On 4/29/06, Patrick Burns <patrick at burns-stat.com> wrote:
I'm not sure what you are aiming at. I would think that a negative weight would mean that the bigger the residual for that observation, the better.
I build these models to forecast future returns, but maybe I am barking up the wrong tree on this one. Let's use a very widely accepted meme to see: Suppose you buy into the Columbine thesis that mean reversion prevails in the short term while momentum prevails in the long term. Let's look at the simplest model that can capture that thesis, a two-period-return model where a is the long-term return and b is the short-term return. In order for this model to work you would need weights of something like 1 and -1 for a and b respectively. Now expand the model to a reasonable number of returns and a larger number of securities and a regression using a shaped set of weights including negative weights starts to look like an attractive idea. Of course I can preprocess the data and then feed it to the model... Any ideas?
I think you will need to specify your model more concretely to get more than passing comments. At any rate, note that if the weights can be negative then the sum of squares to be optimized is no longer a convex function of the coefficients so we really don't have a conventional least squares model and uniqueness and existence have possibly different answers.