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loss function

   Also found in: Wikipedia 0.03 sec.
loss function [′lȯs ‚fəŋk·shən]
(mathematics)
In decision theory, the function, dependent upon the decision and the true underlying distributions, which expresses the loss produced in taking the decision.


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Like the previous researchers, Benigno and Wood-ford find that the expected utility of the representative household can be approximated by a quadratic loss function with no linear terms, a result implying that the welfare associated with a given policy rule can still be readily evaluated (to second-order accuracy) using a first-order-accurate solution of the model.
However, if the goal is to estimate the histogram or the ranks of the area relative risks, different loss function should be considered.
In this case, the accuracy of VaR estimates is gauged by how well they minimize a loss function that represents the evaluator's concerns.
 
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