Selecting forecasting models for portfolio allocation

Techniques for evaluating and selecting multivariate volatility forecasts are not yet as well understood as their univariate counterparts. This paper considers the ability of different loss functions to discriminate between a competing set of forecasting models which are subsequently applied in a portfolio allocation context. It is found that a likelihood based loss function outperforms it competitors including those based on the given portfolio application. This result indicates that the particular application of forecasts is not necessarily the most effective approach under which to select models.