Economic complexity limits accuracy of price probability predictions by gaussian distributions

Olkhov, Victor (2023): Economic complexity limits accuracy of price probability predictions by gaussian distributions.

Abstract

We discuss the economic reasons why the predictions of price and return statistical moments in the coming decades, in the best case, will be limited by their averages and volatilities. That limits the accuracy of the forecasts of price and return probabilities by Gaussian distributions. The economic origin of these restrictions lies in the fact that the predictions of the market-based n-th statistical moments of price and return for n=1,2,.., require the description of the economic variables of the n-th order that are determined by sums of the n-th degrees of values or volumes of market trades. The lack of existing models that describe the evolution of the economic variables determined by the sums of the 2nd degrees of market trades results in the fact that even predictions of the volatilities of price and return are very uncertain. One can ignore existing economic barriers that we highlight but cannot overcome or resolve them. The accuracy of predictions of price and return probabilities substantially determines the reliability of asset pricing models and portfolio theories. The restrictions on the accuracy of predictions of price and return statistical moments reduce the reliability and veracity of modern asset pricing and portfolio theories.

• Item Type: MPRA Paper
• Language: English
• Keywords: price and return; market trade; risk ratings; statistical moments; probability predictions
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C18 - Methodological Issues: General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; F - International Economics > F1 - Trade > F17 - Trade Forecasting and Simulation; F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

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