New forecasting papers 2008-09-22

In this issue we have: Phillips Curve Inflation Forecasts ; Forecasting Macroeconomic Variables in a Small Open Economy ; Forecasting spot electricity prices ; Volatility forecasting and more.


  • Phillips Curve Inflation Forecasts
    Date: 2008-09
    By: James H. Stock
    Mark W. Watson
    This paper surveys the literature since 1993 on pseudo out-of-sample evaluation of inflation forecasts in the United States and conducts an extensive empirical analysis that recapitulates and clarifies this literature using a consistent data set and methodology. The literature review and empirical results are gloomy and indicate that Phillips curve forecasts (broadly interpreted as forecasts using an activity variable) are better than other multivariate forecasts, but their performance is episodic, sometimes better than and sometimes worse than a good (not naïve) univariate benchmark. We provide some preliminary evidence characterizing successful forecasting episodes.
    JEL: C53 E37

  • Forecasting Macroeconomic Variables in a Small Open Economy: A Comparison between Small- and Large-Scale Models
    Date: 2008-09
    By: Rangan Gupta (Department of Economics, University of Pretoria)
    Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg)
    This paper compares the forecasting ability of five alternative models in predicting four key macroeconomic variables, namely, per capita growth rate, the Consumer Price Index (CPI) inflation, the money market rate, and the growth rate of the nominal effective exchange rate for the South African economy. Unlike the theoretical Small Open Economy New Keynesian Dynamic Stochastic General Equilibrium (SOENKDSGE), the unrestricted VAR, and the small-scale Bayesian Vector Autoregressive (BVAR) models, which are estimated based on four variables, the Dynamic Factor Model (DFM) and the large-scale BVAR models use information from a data-rich environment containing 266 macroeconomic time series observed over the period of 1983:01 to 2002:04. The results, based on Root Mean Square Errors (RMSEs), for one- to four-quarters-ahead out-of-sample forecasts over the horizon of 2003:01 to 2006:04, show that, except for the one-qu! arter-ahead forecast of the growth rate of the of nominal effective exchange rate, large-scale BVARs outperform the other four models consistently and, generally, significantly.
    Keywords: Small Open Economy New Keynesian Dynamic Stochastic Model, Dynamic Factor Model, VAR, BVAR, Forecast Accuracy
    JEL: C11 C13 C33 C53

  • Forecasting spot electricity prices: A comparison of parametric and semiparametric time series models
    Date: 2008-06-10
    By: Weron, Rafal
    Misiorek, Adam
    This empirical paper compares the accuracy of 12 time series methods for short-term (day-ahead) spot price forecasting in auction-type electricity markets. The methods considered include standard autoregression (AR) models, their extensions – spike preprocessed, threshold and semiparametric autoregressions (i.e. AR models with nonparametric innovations), as well as, mean-reverting jump diffusions. The methods are compared using a time series of hourly spot prices and system-wide loads for California and a series of hourly spot prices and air temperatures for the Nordic market. We find evidence that (i) models with system load as the exogenous variable generally perform better than pure price models, while this is not necessarily the case when air temperature is considered as the exogenous variable, and that (ii) semiparametric models generally lead to better point and interval forecasts than their competitors, m! ore importantly, they have the potential to perform well under diverse market conditions.
    Keywords: Electricity market; Price forecast; Autoregressive model; Nonparametric maximum likelihood; Interval forecast; Conditional coverage.
    JEL: C53 C22 Q40

  • Volatility forecasting: the jumps do matter
    Date: 2008-06
    By: Fulvio Corsi
    Davide Pirino
    Roberto Renò
    This study reconsiders the role of jumps for volatility forecasting by showing that jumps have positive and mostly significant impact on future volatility. This result becomes apparent once volatility is correctly separated into its continuous and discontinuous component. To this purpose, we introduce the concept of threshold multipower variation (TMPV), which is based on the joint use of bipower variation and threshold estimation. With respect to alternative methods, our TMPV estimator provides less biased and robust estimates of the continuous quadratic variation and jumps. This technique also provides a new test for jump detection which has substantially more power than traditional tests. We use this separation to forecast volatility by employing an heterogeneous autoregressive (HAR) model which is suitable to parsimoniously model long memory in realized volatility time series. Empirical analysis shows that the! proposed techniques improve significantly the accuracy of volatility forecasts for the S&P500 index, single stocks and US bond yields, especially in periods following the occurrence of a jump
    Keywords: volatility forecasting, jumps, bipower variation, threshold estimation, stock, bond
    JEL: G1 C1 C22 C53

  • How informative are macroeconomic risk forecasts? An examination of the Bank of England's inflation forecasts
    Date: 2008
    By: Knüppel, Malte
    Schultefrankenfeld, Guido
    Macroeconomic risk assessments play an important role in the forecasts of many institutions. However, to the best of our knowledge their performance has not been investigated yet. In this work, we study the Bank of England's risk forecasts for inflation. We find that these forecasts do not contain the intended information. Rather, they either have no information content, or even an adverse information content. Our results imply that under mean squared error loss, it is better to use the Bank of England's mode forecasts than the Bank of England's mean forecasts.
    Keywords: Forecast evaluation, risk forecasts, Bank of England inflation forecasts
    JEL: C12 C53 E37

  • Exploiting Non-Linearities in GDP Growth for Forecasting and Anticipating Regime Changes
    Date: 2008-09
    By: David N. DeJong
    Hariharan Dharmarajan
    Roman Liesenfeld
    Jean-Francois Richard
    . . .

  • Modelling and forecasting the yield curve under model uncertainty
    Date: 2008-08
    By: Paola Donati (DG-Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Francesco Donati (Politecnico of Torino, Department of Control and Computer Engineering, Corso Duca degli Abruzzi 24, I-10129 Torino, Italy.)
    This paper proposes a procedure to investigate the nature and persistence of the forces governing the yield curve and to use the extracted information for forecasting purposes. The latent factors of a model of the Nelson-Siegel type are directly linked to the maturity of the yields through the explicit description of the cross-sectional dynamics of the interest rates. The intertemporal dynamics of the factors is then modeled as driven by long-run forces giving rise to enduring effects, and by medium- and short-run forces producing transitory effects. These forces are reconstructed in real time with a dynamic filter whose embedded feedback control recursively corrects for model uncertainty, including additive and parameter uncertainty and possible equation misspecifications and approximations. This correction sensibly enhances the robustness of the estimates and the accuracy of the out-of-sample forecasts, both at ! short and long forecast horizons. JEL Classification: G1, E4, C5.
    Keywords: Yield curve, Model uncertainty, Frequency decomposition, Monetary policy.

  • Do we need time series econometrics
    Date: 2008-09-14
    By: Rao, B. Bhaskara
    Singh, Rup
    Kumar, Saten
    Whether or not there is a need for the unit roots and cointegration based time series econometric methods is a methodological issue. An alternative is the econometrics of the London School of Economics (LSE) and Hendry approach based on the simpler classical methods of estimation. This is known as the general to specific method (GETS). Like all other methodological issues it is difficult to resolve which approach is better. However, we think that GETS is conceptually simpler and very useful in applied work.
    Keywords: GETS, Cointegration, Box-Jenkins's Equations, Hendry, Granger.
    JEL: B49 C22 B41

  • Growth, Centrism and Semi-Presidentialism: Forecasting the Portuguese General Elections
    Date: 2008
    By: Luís Aguiar-Conraria (Universidade do Minho – NIPE)
    Pedro C. Magalhães (University of Lisbon, Social Sciences Institute,)
    Electoral behaviour in recently established democracies has been more frequently treated from the point of view of its unpredictability, volatility and personalistic elements than that of its "fundamentals". In this paper, we wish to contribute to redress this imbalance by advancing a forecasting model for general elections in a young democracy, Portugal. Building on the very familiar notion that the vote for the incumbent can be predicted on the basis of "economics" and "politics", we capture "economics" through a nonlinear specification of economic growth. Furthermore, we include two structural features of Portuguese politics, which have entailed a systematic electoral punishment for the centre-left Socialist Party as the incumbent and for all incumbents involved in political conflicts with the elected president in Portugal's semi-presidentialism.
    Keywords: Forecasting; Portuguese general elections; Economics and elections; Semi-Presidentialism

  • WP n. 18 – The History of Manpower Forecasting in Modelling Labour Market
    Date: 2008-07
    By: Stefano Spalletti (Università di Macerata)
    <p align="justify">The manpower forecasting approach (MFA) was one of the first attempts in educational planning purposes. Manpower planners attempted: 1) to calculate the demand for manpower classified by occupation; 2) to convert this classification of demand by occupation into demand by educational attainment; 3) to devise plans and policies aimed at equating projected demands and probable supplies. The paper recalls the basic principles of the MFA from the perspective of the history of the economic thought and attempts to clarify why there was a virtual failure in MFA during the 1960s.</p>
    Keywords: manpower planning,economic development,labour market
    JEL: O1 O11

  • Short-term interest rate futures as monetary policy forecasts
    Date: 2008-06
    By: Giuseppe Ferrero (Bank of Italy, Economics and International Relations)
    Andrea Nobili (Bank of Italy, Economics and International Relations)
    The prices of futures contracts on short-term interest rates are commonly used by central banks to gauge market expectations concerning monetary policy decisions. Excess returns – the difference between futures rates and the realized rates – are positive, on average, and statistically significant, both in the euro area and in the United States. We find that these biases are significantly related to the business cycle only in the United States. Moreover, the sign and the significance of the estimated relationships with business cycle indicators are unstable over time. Breaking the excess returns down into risk premium and forecast error components, we find that risk premia are counter-cyclical in both areas. On the contrary, ex-post prediction errors, which represent the greater part of excess returns at longer horizons in both areas, are correlated with the business cycle (negatively) only in the United States.
    Keywords: futures rates, monetary policy, risk-premium
    JEL: E43 E44 E52
  • Taken from the NEP-FOR mailing list edited by Rob Hyndman.