nep-for New Economics Papers
on Forecasting
Issue of 2006‒03‒11
six papers chosen by
Rob J Hyndman
Monash University

  1. Monetary Policy Transparency:Lessons from Germany and the Eurozone By Iris Biefang-Frisancho Mariscal; Peter Howells
  2. Monetary Policy Transparency and Uncertainty: A Comparison between the Bank of England and the Bundesbank/ECB By Iris Biefang-Frisancho Mariscal; Peter Howells
  3. Forecasting interest rates: A Comparative assessment of some second generation non-linear model By Dilip M. Nachane; Jose G. Clavel
  4. Information in the Term Structure – The Indian Evidence (I): Modeling the Term Structure and Information at the Short End for Future Inflation By Virmani Vineet
  5. Prediction Markets in Theory and Practice By Justin Wolfers; Eric Zitzewitz
  6. The long-run relationship between market risk and return By John M Maheu; Thomas H McCurdy

  1. By: Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England); Peter Howells (School of Economics, University of the West of England)
    Abstract: The conduct of monetary policy emphasises institutional arrangements which make monetary policy decision-making more ‘transparent’. Judged by these institutional features neither the Bundesbank, nor the ECB, score very highly. We test for (i) agents’ average ability to anticipate policy rate changes under the Bundesbank and the ECB and (ii) and agents’ forecasting unanimity of money market rates. Rising forecasting uncertainty may either be due to a lack of ECB transparency or to larger inflation and growth forecasting errors. Our results indicate that inflation forecast spreads widened amongst private agents and that inflation forecasting uncertainty increased the forecasting spread of money market rates
    Keywords: transparency, yield curve, forecasting uncertainty, Bundesbank, ECB
    JEL: E58
    Date: 2004–12
  2. By: Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England); Peter Howells (School of Economics, University of the West of England)
    Abstract: It is widely believed that institutional arrangements influence the quality of monetary policy outcomes. Judged on its ‘transparency’ characteristics, therefore the Bank of England should do better than the Bundesbank/ECB. We show that this is not confirmed by agents’ ability to anticipate central bank decisions. Furthermore, benefits from transparency should also show in a narrowing of the diversity in cross sectional forecasts. We show that the diversity in interest rate forecasts is no greater under the Bundesbank/ECB than the Bank of England. This suggests that other factors than ‘transparency’ may affect interest rate uncertainty. Increasing difficulty in forecasting inflation appears to play a part in the UK while being less of a problem in Germany.
    Keywords: transparency, yield curve, forecasting uncertainty, Bank of England, Bundesbank/ ECB
    JEL: E58
    Date: 2005–10
  3. By: Dilip M. Nachane (Indira Gandhi Institute of Development Research); Jose G. Clavel (Universidad de Murcia)
    Abstract: Modelling and forecasting of interest rates has traditionally proceeded in the framework of linear stationary models such as ARMA and VAR, but only with moderate success. We examine here four models which account for several specific features of real world asset prices such as non-stationarity and non-linearity. Our four candidate models are based respectively on wavelet analysis, mixed spectrum analysis, non-linear ARMA models with Fourier coefficients, and the Kalman filter. These models are applied to weekly data on interest rates in India, and their forecasting performance is evaluated vis-vis three GARCH models (GARCH (1,1), GARCH-M (1,1) and EGARCH (1,1)) as well as the random walk model. The Kalman filter model emerges at the top, with wavelet and mixed spectrum models also showing considerable promise.
    Keywords: Interest rates, wavelets, mixed spectra, non-linear ARMA, Kalman filter, GARCH, Forecast encompassing
    Date: 2005
  4. By: Virmani Vineet
    Abstract: This study is part of an on-going work on assessing the information content of the term structure in India for future inflation, future short rates and real interest rates. In this part, first the Indian term structure is modeled using three alternative specifications and changes in slope of the term structure at the short-end assessed for forecastability of inflation. Performance of two atheoretical (Nelson and Siegel, 1987 and Svensson, 1994) models is compared against empirical implications of a general equilibrium (Cox, Ingersoll and Ross, 1985) model. While Svensson is seen to offer no improvement over Nelson-Siegel, Cox-Ingersoll-Ross comes out as marginally superior to both on the criteria of mean absolute pricing and yield errors (both in-sample and out-of-sample), behaviour of the short and the long rates, stability of the parameters and behaviour of forward rates for maturities 1-8 years. This is encouraging because models like Nelson-Siegel and Svensson are designed to fit the observed yield curves, while Cox-Ingersoll-Ross is a theoretical model derived from intertemporal description of a competitive economy. On the information content of the term structure, in the sample under study, change in the slope of the term structure seems to have no information for inflation changes over the horizon 1 month to 2 years. Results could be sample and/or sampling-frequency specific. Results for the long end of the term structure (from a bigger sample) follows.
    Date: 2006–03–02
  5. By: Justin Wolfers (Wharton, University of Pennsylvania, CEPR, NBER and IZA Bonn); Eric Zitzewitz (Stanford GSB)
    Abstract: Prediction Markets, sometimes referred to as "information markets", "idea futures" or "event futures", are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks. Along the way, we highlight areas ripe for future research.
    Keywords: prediction markets, information markets, information aggregation
    JEL: C53 D8 G14
    Date: 2006–03
  6. By: John M Maheu; Thomas H McCurdy
    Abstract: Many finance applications require an annual measure of the market premium for equity. Using a long sample combined with a very parsimonious conditional variance function, we find a positive relationship between market risk and expected excess returns. Unlike traditional exponential-smoothing filters, our specification has a well-defined unconditional variance and allows for mean reverting volatility forecasts. Although total volatility is significantly priced, the smooth long-run component in volatility is more important for capturing the dynamics of the premium. This parameterization produces realistic time-varying market equity premium estimates over the entire 1840-2003 period. For example, our results show that the premium was relatively low in the mid-1990s but has recently increased. Results are robust to univariate specifications that condition on either levels or logs of past realized volatility (RV), as well as to a new bivariate risk-return model of returns and RV for which the conditional variance of excess returns is the conditional expectation of the realized volatility process.
    JEL: G12 C50

This nep-for issue is ©2006 by Rob J Hyndman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.