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on Forecasting |
| By: | Todd E. Clark; Michael W. McCracken |
| Abstract: | Motivated by the common finding that linear autoregressive models forecast better than models that incorporate additional information, this paper presents analytical, Monte Carlo, and empirical evidence on the effectiveness of combining forecasts from nested models. In our analytics, the unrestricted model is true, but as the sample size grows, the DGP converges to the restricted model. This approach captures the practical reality that the predictive content of variables of interest is often low. We derive MSE-minimizing weights for combining the restricted and unrestricted forecasts. In the Monte Carlo and empirical analysis, we compare the effectiveness of our combination approach against related alternatives, such as Bayesian estimation. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp06-02&r=for |
| By: | Paul Levine (University of Surrey); Peter McAdam (European Central Bank); Joseph Pearlman (London Metropolitan University) |
| Abstract: | We examine an interesting puzzle in monetary economics between what monetary authorities claim (namely to be forward-looking and pre-emptive) and the poor stabilization properties routinely reported for forecast-based rules. Our resolution is that central banks should be viewed as following ‘Calvo-type’ inflation-forecast-based (IFB) interest rate rules which depend on a discounted sum of current and future rates of inflation. Such rules might be regarded as both within the legal frameworks, and potentially mimicking central bankers’ practice. We find that Calvo-type IFB interest rate rules are first: less prone to indeterminacy than standard rules with a finite forward horizon. Second, for such rules in difference form the indeterminacy problem disappears altogether. Third, optimized forms have good stabilization properties as they become more forward-looking, a property that sharply contrasts that of standard IFB rules. Fourth, they appear potentially data coherent when incorporated into a well-known estimated DSGE model of the Euro-area. |
| Keywords: | Inflation-forecast-based interest rate rules, Calvo-type interest rate rules, indeterminacy |
| JEL: | E52 E37 E58 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0206&r=for |
| By: | Jeremy M. Piger; Robert H. Rasche |
| Abstract: | We measure the relative contribution of the deviation of real activity from its equilibrium (the gap), *supply shock* variables, and long-horizon inflation expectations for explaining the U.S. inflation rate in the post-war period. For alternative specifications for the inflation driving process and measures of inflation and the gap we reach a similar conclusion: the contribution of changes in long-horizon inflation expectations dominates that for the gap and supply shock variables. Put another way, variation in long-horizon inflation expectations explains the bulk of the movement in realized inflation. We also use our preferred specification for the inflation driving process to compute a history of model-based forecasts of the inflation rate. For both short and long horizons these forecasts are close to those observed from surveys. |
| Keywords: | Government securities ; Inflation (Finance) |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-013&r=for |
| By: | Refet S. Gürkaynak; Andrew T. Levin; Eric T. Swanson |
| Abstract: | We investigate the extent to which inflation targeting helps anchor long-run inflation expectations by comparing the behavior of daily bond yield data in the United Kingdom and Sweden--both inflation targeters--to that in the United States, a non-inflation-targeter. Using the difference between far-ahead forward rates on nominal and inflation-indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons, we examine how much, if at all, far-ahead forward inflation compensation moves in response to macroeconomic data releases and monetary policy announcements. In the U.S., we find that forward inflation compensation exhibits highly significant responses to economic news. In the U.K., we find a level of sensitivity similar to that in the U.S. prior to the Bank of England gaining independence in 1997, but a striking absence of such sensitivity since the central bank became independent. In Sweden, we find that forward inflation compensation has been insensitive to economic news over the whole period for which we have data. Our findings support the view that a well-known and credible inflation target helps to anchor the private sector's perceptions of the distribution of long-run inflation outcomes. |
| Keywords: | Inflation (Finance) ; Prices ; Monetary policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-09&r=for |
| By: | Olivier Guedj (Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;) |
| Abstract: | We study the statistics of earning forecasts of US, EU, UK and JP stocks during the period 1987-2004. We confirm, on this large data set, that financial analysts are on average over-optimistic and show a pronounced herding behavior. These effects are time dependent, and were particularly strong in the early nineties and during the Internet bubble. We furthermore find that their forecast ability is, in relative terms, quite poor and comparable in quality, a year ahead, to the simplest `no change' forecast. As a result of herding, analysts agree with each other five to ten times more than with the actual result. We have shown that significant differences exist between US stocks and EU stocks, that may partly be explained as a company size effect. Interestingly, herding effects appear to be stronger in the US than in the Eurozone. Finally, we study the correlation of errors across stocks and show that significant sectorization occurs, some sectors being easier to predict than others. These results add to the list of arguments suggesting that the tenets of Efficient Market Theory are untenable. |
| JEL: | G10 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:sfi:sfiwpa:500062&r=for |
| By: | Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Laurent Laloux (Science & Finance, Capital Fund Management); M. Augusta Miceli; Marc Potters (Science & Finance, Capital Fund Management) |
| Abstract: | We present a general method to detect and extract from a finite time sample statistically meaningful correlations between input and output variables of large dimensionality. Our central result is derived from the theory of free random matrices, and gives an explicit expression for the interval where singular values are expected in the absence of any true correlations between the variables under study. Our result can be seen as the natural generalization of the Mar?cenko-Pastur distribution for the case of rectangular correlation matrices. We illustrate the interest of our method on a set of macroeconomic time series. |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:sfi:sfiwpa:500066&r=for |
| By: | Martin Lettau; Stijn Van Nieuwerburgh |
| Abstract: | Evidence of stock return predictability by financial ratios is still controversial, as documented by inconsistent results for in-sample and out-of-sample regressions and by substantial parameter instability. This paper shows that these seemingly incompatible results can be reconciled if the assumption of a fixed steady-state mean of the economy is relaxed. We find strong empirical evidence in support of shifts in the steady-state and propose simple methods to adjust financial ratios for such shifts. The forecasting relationship of adjusted price ratios and future returns is statistically significant and stable over time. We also show that shifts in the steady-state are responsible for the parameter instability and poor out-of-sample performance of unadjusted price ratios that are found in the data. Our conclusions hold for a variety of financial ratios and are robust to changes in the econometric technique used to estimate shifts in the steady-state. |
| JEL: | G1 G12 G11 C53 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12109&r=for |
| By: | Jeanjean, Thomas; Cazavan-Jeny, Anne |
| Abstract: | This paper focuses on how forecasts information is disclosed in IPO prospectuses. In France, managers report either detailed forecasts or only a brief summary. We investigate the determinants and consequences of the varying levels of detail provided in these forecasts. Based on a sample of 82 IPOs on the Euronext Paris market (2000-2002), we show that only two variables are associated with highly detailed forecast disclosures: forecast horizon and firm age. We also find that the forecast error decreases as the level of detail in the forecast disclosures increases. This finding is robust to our reverse causality test (Heckman two-stage self-selection procedure) and suggests that the level of detail in forecast disclosures enhances the reliability of earnings forecasts. |
| Keywords: | IPO; forecast disclosure; forecast error |
| JEL: | G14 G34 M41 |
| Date: | 2005–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:0827&r=for |