Statistical Confidence Level Band for Modeling Financial Markets Uncertainty
Introduction Uncertainty is an inherent property of financial markets due to its highly dynamic and ever-evolving nature. Therefore, forecast models of financial markets should not focus on pin-point accuracy, for it will be spurious accuracy. Rather the output should be within a statistical confidence levels band. Bands can be based on quantiles of the Probability Distribution Function of the data. Case study: Singapore’s 6-month T-Bill and SORA (Singapore Overnight Rate Average). The chart above shows the time series (daily yields) of Monetary Authority of Singapore (MAS) 6-month T-Bill (6MT), overlaid on the SORA. SORA has a broad positive correlation with 6MT but has daily swings of significant volatility. This is natural because SORA’s daily volatility is a feature of an unsecured overnight funding benchmark: sensitive to immediate liquidity, calendar, and cross ‑ currency conditions of banks and other users while 6MT yield is a forward-looking, term ‑ averaged pr...