RELATIVE PROFIT— A NEW METRIC TO EVALUATE THE PERFORMANCE OF STOCK PRICE FORECASTING MODELS

Authors

Tiejun Wang, Southwestern University of Finance and EconomicsFollow
Ping Li, Southwestern University of Finance and EconomicsFollow
Marko Nieminen, Aalto UniversityFollow
Qing Li, Southwestern University of Finance and EconomicsFollow

Abstract

Stock price forecasting models with lower Mean Squared Error (MSE) are more “welcome" than those who have higher MSE. However, this “welcome" may disappear when lower MSE leads to an unexpected loss whereas higher MSE leads to a positive profit in a practical investment. The reason is that MSE aims to evaluate models in the view of “accuracy", which has nothing to do with profit. We therefore propose the concept of “forecasting efficiency" that aims to evaluate models in the view of investment or profit. A comprehensive but concise metric: Relative Profit (RP) is designed to better evaluate which model really pleases investors. Finally, a comparison is made between RP and other popular metrics to demonstrate that RP is a good supplement to forecasting model evaluation.

Recommended Citation

Wang, Tiejun; Li, Ping; Nieminen, Marko; and Li, Qing, "RELATIVE PROFIT— A NEW METRIC TO EVALUATE THE PERFORMANCE OF STOCK PRICE FORECASTING MODELS" (2014). PACIS 2014 Proceedings. 201.
https://aisel.aisnet.org/pacis2014/201