nep-for New Economics Papers
on Forecasting
Issue of 2005‒12‒20
four papers chosen by
Rob J Hyndman
Monash University

  1. The Information in Long-Maturity Forward Rates: Implications for Exchange Rates and the Forward Premium Anomaly By Jacob Boudoukh; Matthew Richardson; Robert Whitelaw
  2. Intraday Value at Risk (IVaR) Using Tick-by-Tick Data with Application to the Toronto Stock Exchange By Georges Dionne; Pierre Duchesne; Maria Pacurar
  3. The Myth of Long-Horizon Predictability By Jacob Boudoukh; Matthew Richardson; Robert Whitelaw
  4. Demography and housing demand - What can we learn from residential construction data? By Lindh, Thomas; Malmberg, Bo

  1. By: Jacob Boudoukh; Matthew Richardson; Robert Whitelaw
    Abstract: The forward premium anomaly is one of the most robust puzzles in financial economics. We recast the underlying parity relation in terms of cross-country differences between forward interest rates rather than spot interest rates with dramatic results. These forward interest rate differentials have statistically and economically significant forecast power for annual exchange rate movements, both in- and out-of-sample, and the signs and magnitudes of the corresponding coefficients are consistent with economic theory. Forward interest rates also forecast future spot interest rates and future inflation. Thus, we attribute much of the forward premium anomaly to the anomalous behavior of short-term interest rates, not to a breakdown of the link between fundamentals and exchange rates.
    JEL: G15 F31
    Date: 2005–12
  2. By: Georges Dionne; Pierre Duchesne; Maria Pacurar
    Abstract: The objective of this paper is to investigate the use of tick-by-tick data for market risk measurement. We propose an Intraday Value at Risk (IVaR) at different horizons based on irregularly time-spaced high-frequency data by using an intraday Monte Carlo simulation. An UHF-GARCH model extending the framework of Engle (2000) is used to specify the joint density of the marked-point process of durations and high-frequency returns. We apply our methodology to transaction data for the Royal Bank and the Placer Dome stocks traded on the Toronto Stock Exchange. Results show that our approach constitutes reliable means of measuring intraday risk for traders who are very active on the market. The UHF-GARCH model performs well out-of-sample for almost all the time horizons and the confidence levles considered even when normality is assumed for the distribution of the error term, provided that intraday seasonality has been accounted for prior to the estimation.
    Keywords: Value at Risk, tick-by-tick data, UHF-GARCH models, intraday market risk, high-frequency models, intraday Monte Carlo simulation, Intraday Value at Risk
    JEL: C22 C41 C53 G15
    Date: 2005
  3. By: Jacob Boudoukh; Matthew Richardson; Robert Whitelaw
    Abstract: The prevailing view in finance is that the evidence for long-horizon stock return predictability is significantly stronger than that for short horizons. We show that for persistent regressors, a characteristic of most of the predictive variables used in the literature, the estimators are almost perfectly correlated across horizons under the null hypothesis of no predictability. For example, for the persistence levels of dividend yields, the analytical correlation is 99% between the 1- and 2-year horizon estimators and 94% between the 1- and 5-year horizons, due to the combined effects of overlapping returns and the persistence of the predictive variable. Common sampling error across equations leads to ordinary least squares coefficient estimates and R2s that are roughly proportional to the horizon under the null hypothesis. This is the precise pattern found in the data. The asymptotic theory is corroborated, and the analysis extended by extensive simulation evidence. We perform joint tests across horizons for a variety of explanatory variables, and provide an alternative view of the existing evidence.
    JEL: G12 G10 C32
    Date: 2005–12
  4. By: Lindh, Thomas (Institute for Futures Studies); Malmberg, Bo (Institute for Futures Studies)
    Abstract: There are obvious reasons why residential construction should depend on the population’s age structure. We estimate this relation on Swedish time series data and OECD panel data. Large groups of young adults are associated with higher rates of residential construction. But there is also a significant negative effect from those above 75. Age effects on residential investment are robust and forecast well out-of-sample in contrast to the corresponding house price results. This may explain why the debate around house prices and demography has been rather inconclusive. Rapidly aging populations in the industrialized world makes the future look bleak for the construction industry of these countries.
    Keywords: demography; housing demand
    JEL: J11
    Date: 2005–12–12

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