nep-for New Economics Papers
on Forecasting
Issue of 2006‒06‒10
eleven papers chosen by
Rob J Hyndman
Monash University

  1. Assessing the Impact of Market Microstructure Noise and Random Jumps on the Relative Forecasting Performance of Option-Implied and Returns-Based Volatility By Gael M. Martin; Andrew Reidy; Jill Wright
  2. General to Specific Modelling of Exchange Rate Volatility : a Forecast Evaluation By Luc, BAUWENS; Genaro, SUCARRAT
  3. The Spline GARCH Model for Unconditional Volatility and its Global Macroeconomic Causes By Robert F. Engle; Jose Gonzalo Rangel
  4. Real Exchange Rate Misalignment: Prelude to Crisis? By David M. Kemme; Saktinil Roy;
  5. Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio By Ivan Baboucek; Martin Jancar
  6. Core inflation at the Bank of Canada A critique By Kevin Clinton
  7. The Application of Structured Feedforward Neural Networks to the Modelling of Daily Series of Currency in Circulation By Marek Hlavacek; Michael Konak; Josef Cada
  8. Long-Horizon Mean Reversion for the Brussels Stock Exchange: Evidence for the 19th Century By J. ANNAERT; W. VAN HYFTE
  9. An Economy in Transition and DSGE: What the Czech National Bank’s New Projection Model Needs By Jaromir Benes; Tibor Hledik; Michael Kumhof; David Vavra
  10. Optimal Forward-Looking Policy Rules in the Quarterly Projection Model of the Czech National Bank By Jan Strasky
  11. Determining Factors of Czech Foreign Trade: A Cross-Section Time Series Perspective By Vladimir Benacek; Jiri Podpiera; Ladislav Prokop

  1. By: Gael M. Martin; Andrew Reidy; Jill Wright
    Abstract: This paper presents a comprehensive empirical evaluation of option-implied and returns-based forecasts of volatility, in which new developments related to the impact on measured volatility of market microstructure noise and random jumps are explicitly taken into account. The option-based component of the analysis also accommodates the concept of model-free implied volatility, such that the forecasting performance of the options market is separated from the issue of misspecification of the option pricing model. The forecasting assessment is conducted using an extensive set of observations on equity and option trades for News Corporation for the 1992 to 2001 period, yielding certain clear results. According to several different criteria, the model-free implied volatility is the best performing forecast, overall, of future volatility, with this result being robust to the way in which alternative measures of future volatility accommodate microstructure noise and jumps. Of the volatility measures considered, the one which is, in turn, best forecast by the option-implied volatility is that measure which adjusts for microstructure noise, but which retains some information about random jumps.
    Keywords: Volatility Forecasts; Quadratic Variation; Intraday Volatility Measures; Model-free Implied Volatility.
    JEL: C10 C53 G12
    Date: 2006
  2. By: Luc, BAUWENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Genaro, SUCARRAT
    Abstract: The general-to-specific (GETS) approach to modelling is widely employed in the modelling of economic series, but less so in financial volatility modelling due to computational complexity when many explanatory variables are involved. This study proposes a simple way of avoiding this problem and undertakes an out-of-sample forecast evaluation of the methodology applied to the modelling of weekly exchange rate volatility. Our findings suggest that GETS specifications are especially valuable in conditional forecasting, since the specification that employs actual values on the uncertain information performs particularly well.
    Keywords: Exchange Rate Volatility, General to Specific, Forecasting
    JEL: C53 F31
    Date: 2006–02–15
  3. By: Robert F. Engle; Jose Gonzalo Rangel
    Abstract: 25 years of volatility research has left the macroeconomic environment playing a minor role. This paper proposes modeling equity volatilities as a combination of macroeconomic effects and time series dynamics. High frequency return volatility is specified to be the product of a slow moving deterministic component, represented by an exponential spline, and a unit GARCH. This deterministic component is the unconditional volatility, which is then estimated for nearly 50 countries over various sample periods of daily data. Unconditional volatility is then modeled as an unbalanced panel with a variety of dependence structures. It is found to vary over time and across countries with high unconditional volatility resulting from high volatility in the macroeconomic factors GDP, inflation and short term interest rate, and with high inflation and slow growth of output. Volatility is higher for emerging markets and for markets with small numbers of listed companies and market capitalization, but also for large economies. The model allows long horizon forecasts of volatility to depend on macroeconomic developments, and delivers estimates of the volatility to be anticipated in a newly opened market.
    Keywords: . Arch, garch, global volatility, spline and volatility.
    JEL: C14 C19
    Date: 2005–12
  4. By: David M. Kemme; Saktinil Roy;
    Abstract: A model of the long run equilibrium real exchange rate based upon macroeconomic fundamentals is employed to calculate real exchange rate misalignments for Poland and Russia during the 1990s using the Beveridge and Nelson (1981) decomposition of macrofundamentals into transitory and permanent components. Short run movements of the real exchange rate are estimated with ARIMA and GARCH error correction specifications. The different nominal exchange rate regimes of the two countries generate different levels of misalignment and different responses to exogenous shocks. The average misalignment in Russia is substantially greater than that in Poland, indicating incipient pressures to devalue the ruble immediately preceding the August 1998 crisis. The half life of an exogenous shock is found to be much shorter for Poland than for Russia in the pre-crisis period. Dynamic forecasts indicate that the movements of the real exchange rate in the post-crisis period are significantly different from those in the pre-crisis period. Thus, the currency crisis in Russia could not be anticipated with the movements of the real exchange rate estimated with the macroeconomic fundamentals.
    Keywords: Russia, Poland, equilibrium real exchange rates, misalignment, cointegration, exogenous shocks, macroeconomic crises
    JEL: F31 F36 P17
    Date: 2005–10–01
  5. By: Ivan Baboucek; Martin Jancar
    Abstract: The paper concerns macro-prudential analysis. It uses an unrestricted VAR model to empirically investigate transmission involving a set of macroeconomic variables describing the development of the Czech economy and the functioning of its credit channel in the past eleven years. Its novelty lies in the fact that it provides the first systematic assessment of the links between loan quality and macroeconomic shocks in the Czech context. The VAR methodology is applied to monthly data transformed into percentage change. The out-of-sample forecast indicates that the most likely outlook for the quality of the banking sector's loan portfolio is that up to the end of 2006 the share of non-performing loans in it will follow a slightly downward trend below double-digit rates. The impulse response is augmented by stress testing exercises that enable us to determine a macroeconomic early warning signal of any worsening in the quality of banks' loans. The paper suggests that the Czech banking sector has attained a considerable ability to withstand a credit risk shock and that the banking sector's stability is compatible both with price stability and with economic growth. Despite being devoted to empirical investigation, the paper pays great attention to methodological issues. At the same time it tries to present both the VAR model and its results transparently and to openly discuss their weak points, which to a large degree can be attributed to data constraints or to the evolutionary nature of an economy in transition.
    Keywords: Czech Republic, Macro-prudential analysis, Non-performing loans, VAR model.
    JEL: G18 G21 C51
    Date: 2005–01
  6. By: Kevin Clinton (Queen's University)
    Abstract: Core inflation is a useful concept for the theory and practice of monetary policy. The Bank of Canada maintains, in addition, that core inflation should be, and has in fact been, a useful predictor of headline inflation. Under the bank’s policy of inflation targeting, however, this is incorrect: over horizons of a year or more the best forecast should be the 2 percent target; and core inflation should have no predictive content. Post- 1995 evidence confirms this argument.
    Keywords: TBA
    Date: 2006–05
  7. By: Marek Hlavacek; Michael Konak; Josef Cada
    Abstract: One of the most significant factors influencing the liquidity of the financial market is the amount of currency in circulation. Although the central bank is responsible for the distribution of the currency it cannot assess the demand for the currency, as that demand is influenced by the non-banking sector. Therefore, the amount of currency in circulation has to be forecasted. This paper introduces a feedforward structured neural network model and discusses its applicability to the forecasting of currency in circulation. The forecasting performance of the new neural network model is compared with an ARIMA model. The results indicate that the performance of the neural network model is better and that both models might be applied at least as supportive tools for liquidity forecasting.
    Keywords: Neural network, seasonal time series, currency in circulation.
    JEL: C45 C53
    Date: 2005–12
    Abstract: In this paper, we introduce a completely new and unique historical dataset of Belgian stock returns during the nineteenth and the beginning of the twentieth century. This high-quality database comprises stock price and company related information on more than 1500 companies. Given the extensive use of CRSP return data and the data mining risks involved it provides an interesting out-of-sample dataset with which to test the robustness of ‘prevailing’ asset pricing anomalies. We re-examine mean reversals in long-horizon returns using the framework of Hodrick (1992) and Jegadeesh (1991). Our simulation experiments demonstrate that it has considerably better small sample properties than the traditional regression framework of Fama and French (1988a). In the short run, returns exhibit strong persistence, which is partially induced by infrequent trading. Contrary to Fama and French (1988a) and Poterba and Summers (1988), our results suggest that, in the long run, there is little to no evidence of stock prices containing autoregressive stationary components but instead resemble a random walk. Capital appreciation returns exhibit stronger time-varying behavior than total returns. Belgian stock returns demonstrate significant seasonality in January notwithstanding the absence of taxes. In addition, in contrast to other months, January months do show some evidence of mean reversion.
    Keywords: Brussels Stock Exchange, Financial Market History, Market Efficiency, Univariate Stock Return Predictability
    JEL: G10 G14 N23
    Date: 2006–03
  9. By: Jaromir Benes; Tibor Hledik; Michael Kumhof; David Vavra
    Abstract: Since the introduction of the inflation targeting regime in 1998 the Czech National Bank has made considerable progress in developing formal tools for supporting its Forecasting and Policy Analysis System. This paper documents the advances in the ongoing research aimed at developing a DSGE small open economy model designed to capture some of the most important features of the Czech economy—both the business-cycle regularities and the recent developments associated with the economy’s transition and its convergence towards the industrialized European countries. The model in its current form is able to capture trends in relative prices, allow for medium-convergence in expenditure shares, and deal with the undercapitalization and investment inflow issues. Besides the model exhibits real and nominal rigidities that are in line with the recent New Open Economy Macroeconomics literature built fully on first principles. The innovative features of our model include the international currency pricing scheme permitting flexible calibration of import and export price elasticities along with the disconnect of the nominal exchange rate, the policy reaction function with a parameterized forecast horizon, and a generalized capital accumulation equation with imperfect intertemporal substitution of investment.
    Keywords: .
    JEL: C32 E32
    Date: 2005–12
  10. By: Jan Strasky
    Abstract: This paper analyses the performance of the inflation forecast-based (IFB) monetary policy rules in the quarterly projection model of the Czech National Bank. The paper begins by reviewing the model and its parametrization, including the variance-covariance matrix of disturbances employed in simulations. The main part of the paper presents the results of an extensive grid search over various targeting horizons and coefficient values for a simple IFB rule with optimized coefficients, and suggests three possibilities for improvement: a shorter targeting horizon, a higher relative weight placed on inflation gap stabilization, and a lower coefficient on partial interest rate adjustment. These results are supported by an analysis of the impact of individual shocks on the optimal coefficients of the IFB rule. The last section of the paper argues for inclusion of the real exchange rate stabilization objective in the policy maker’s loss function and repeats the grid search for an optimal rule allowing for the real exchange rate feedback term. The previous results are not dramatically altered and we conclude that the stabilization properties of the extended rules are comparable with the those of the original optimized IFB rules.
    Keywords: Exchange rates, inflation targeting, monetary policy rules, open economy.
    JEL: E52 E58 F41
    Date: 2005–12
  11. By: Vladimir Benacek; Jiri Podpiera; Ladislav Prokop
    Abstract: By quantifying the determining factors of Czech trade during 1993-2002, this paper enriches the empirical trade literature with evidence from an economy that has undergone intensive structural changes. Our findings lend significance to standard macroeconomic variables such as aggregate demand and the real exchange rate. Apart from these, however, liberalisation of tariffs, the evolution of unit prices of exports and imports, and economies of scale also played a significant role. An out-of-sample forecast for the trade balance was carried out for 2003-2004.
    Keywords: Dynamic estimation, export and import dynamics, trade determinants.
    JEL: C23 F14 F32
    Date: 2005–11

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