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on Forecasting |
| By: | Arnaud Mehl (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper investigates the extent to which the slope of the yield curve in emerging economies predicts domestic inflation and growth. It also examines international financial linkages and how the US and the euro area yield curves help to predict. It finds that the domestic yield curve in emerging economies has in-sample information content even after controlling for inflation and growth persistence, at both short and long forecast horizons, and that it often improves out-of-sample forecasting performance. Differences across countries are seemingly linked to market liquidity. The paper further finds that the US and the euro area yield curves also have in- and out-of-sample information content for future inflation and growth in emerging economies. In particular, for emerging economies that have an exchange rate peg to the US dollar, the US yield curve is often found to be a better predictor than these economies’ own domestic curve and to causally explain their movements. This suggests that monetary policy changes and short-term interest rate pass-through are key drivers of international financial linkages through movements from the low end of the yield curve. JEL Classification: E44, F3, C5. |
| Keywords: | emerging economies, yield curve, forecasting, international linkages. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060691&r=for |
| By: | Ekaterini Panopoulou |
| Abstract: | This paper investigates the predictive ability of financial variables for real growth in the euro area through bivariate and multivariate non-parametric Granger causality tests. Apart from assessing the within-country forecasting ability of commonly-employed financial variables, such as the term spread, the stock market returns and the growth of real money supply, we also test for cross-country influences. Employing a monthly dataset for the period from January 1988 to May 2005, we find that financial variables are useful leading indicators for euro area growth at a joint level, albeit at different horizons, ranging from one to six quarters. In addition to non-parametrically testing for Granger causality, we consider testing the out of sample forecasting ability of the respective financial variables in a parametric framework for the period from 2001 onwards. Our results from this parametric framework corroborate our non-parametric findings, yielding the stock market returns and the term spread as the single more powerful predictor on a country and euro area basis, respectively. |
| Keywords: | Granger causality; forecasting accuracy; money supply; output growth; term spread; stock returns; |
| Date: | 2006–11–16 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp178&r=for |
| By: | MArcelo Carvalho (DEPARTMENT ECONOMIC STATISTICS AND DECISION SUPPORT, STOCKHOLM SCHOOL OF ECONOMICS,); MArco Aurelio Freire (BANK BOSTON); Marcelo Cunha Medeiros (Department of Economics PUC-Rio); Leonardo Souza (ENERGY STATISTICS SECTION UNITED NATIONS) |
| Abstract: | The goal of this paper is twofold. First, using five of the most actively traded stocks in the Brazilian financial market, this paper shows that the normality assumption commonly used in the risk management area to describe the distributions of returns standardized by volatilities is not compatible with volatilities estimated by EWMA or GARCH models. In sharp contrast, when the information contained in high frequency data is used to construct the realized volatility measures, we attain the normality of the standardized returns, giving promise of improvements in Value-at-Risk statistics. We also describe the distributions of volatilities of the Brazilian stocks, showing that they are nearly lognormal. Second, we estimate a simple model to the log of realized volatilities that differs from the ones in other studies. The main difference is that we do not find evidence of long memory. The estimated model is compared with commonly used alternatives in an out-of-sample forecasting experiment. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:530&r=for |
| By: | Helge Berger (Free University Berlin, Department of Economics, Boltzmannstrasse 20, 12161 Berlin, Germany.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper shows that there is a substantial degree of heterogeneity in forecast accuracy among Fed watchers. Based on a novel database for 268 professional forecasters since 1999, the average forecast error of FOMC decisions varies 5 to 10 basis points between the best and worst-performers across the sample. This heterogeneity is found to be related to both the skills of analysts – such as their educational and employment backgrounds – and to geography. In particular, there is evidence that forecasters located in regions which experience more idiosyncratic economic conditions perform worse in anticipating monetary policy. Moreover, systematic forecaster heterogeneity is economically important as it leads to greater financial market volatility after FOMC meetings. Finally, Fed communication may exert an influence on forecast accuracy. JEL Classification: E52, E58, G14. |
| Keywords: | monetary policy, forecast, Federal Reserve, FOMC, geography, skills, heterogeneity, survey data, communication, United States. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060695&r=for |
| By: | BAGELLA MICHELE; BECCHETTI LEONARDO; CICIRETTI ROCCO |
| Abstract: | The paper investigates the stability of stock markets by exploring how specific and aggregate shocks generate reassessment of investors and analysts expectations on earnings forecasts and on the fundamental value of equities. In this paper we evaluate the effects of this combined reaction on the implied equity risk premium extracted from a standard two-stage dividend discount (DD) model. Our findings show: i) substantial overreaction of investors to both downward and upward firm specific forecast revisions, plus overreaction to changes in GDP and to the announcements of the Consumer and Business Confidence indicator before the burst of the March 2000 stock market bubble; ii) a fall in the positive overreaction to upward earning forecast revisions and GDP changes after the stock bubble burst and a loss of significance of overreaction to upward forecast revisions and to announcements of the Consumer Confidence Index after the 9/11 terrorist attack. These findings appear broadly consistent with the hypothesis of reduced participation of uninformed (noise) traders to financial markets. We also observe that the interplay of monetary policy stance, analysts’ forecasts and investors confidence expressed by equity risk premia around extreme shocks is such that it reduces financial market instability potentially generated by them. |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceiswp:211&r=for |