nep-for New Economics Papers
on Forecasting
Issue of 2010‒11‒20
eleven papers chosen by
Rob J Hyndman
Monash University

  1. Can Turkish Recessions be Predicted? By Adrian Pagan
  2. A Cholesky-MIDAS model for predicting stock portfolio volatility By Ralf Becker; Adam Clements; Robert O'Neill
  3. A Kernel Technique for Forecasting the Variance-Covariance Matrix By Ralf Becker; Adam Clements; Robert O'Neill
  4. Forecasting Inflation (and the Business Cycle?) with Monetary Aggregates By João Valle e Azevedo; Ana Pereira
  5. Modeling & Forecasting of Macro-Economic Variables of India: Before, During & After Recession By Sinha, Pankaj; Gupta, Sushant; Randev, Nakul
  6. Modelling and Forecasting UK Mortgage Arrears and Possessions By Janine Aron; John Muellbauer
  7. Time-varying spot and futures oil price dynamics By Guglielmo Caporale; Davide Ciferri; Alessandro Girardi
  8. Reporting of Internal Control Deficiencies, Restatements, and Management Forecasts By Katsuhiko Muramiya; Tomomi Takada
  9. Does consistency predict accuracy of beliefs?: Economists surveyed about PSA By Berg, Nathan; Biele, Guido; Gigerenzer, Gerd
  10. Robust Estimation and Forecasting of the Capital Asset Pricing Model By Guorui Bian; Michael McAleer; Wing-Keung Wong
  11. Mandatory Adoption of IFRS and Analysts’ Forecasts Information Properties By Beuselinck, C.A.C.; Joos, P.P.M.; Khurana, I.K.; Meulen, S. van der

  1. By: Adrian Pagan (QUT/UTS)
    Abstract: In response to the widespread criticism that macro-economists failed to predict the global recession coming from the GFC, we look at whether recessions in Turkey can be predicted. Because the growth in Turkish GDP is quite persistent one might expect this is possible. But it is the sign of GDP growth that needs to be forecast if we are to predict a recession, and this is made more difficult by the persistence in GDP growth. We build a small SVAR model of the Turkish economy that is motivated by New Keynesian models of the open economy, and find that using the variables entering it increases predictive success, although it is still the case that the predictive record is not good. Non-linear models for Turkish growth are then found to add little to predictive ability. Fundamentally, recession prediction requires one to forecast future shocks to the economy, and thus one needs some indicators of these. The paper explores a range of indicators for the Turkish economy, but none are particularly advantageous. Developing a bigger range of these indicators should be a priority for future Turkish macro-economic research.
    Keywords: Business cycles, binary models, predicting recessions
    Date: 2010–10–10
  2. By: Ralf Becker (University of Manchester); Adam Clements (QUT); Robert O'Neill (University of Manchester)
    Abstract: This paper presents a simple forecasting technique for variance covariance matrices. It relies significantly on the contribution of Chiriac and Voev (2010) who propose to forecast elements of the Cholesky decomposition which recombine to form a positive definite forecast for the variance covariance matrix. The method proposed here combines this methodology with advances made in the MIDAS literature to produce a forecasting methodology that is ‡exible, scales easily with the size of the portfolio and produces superior forecasts in simulation experiments and an empirical application.
    Keywords: Cholesky, Midas, volatility forecasts
    JEL: C22 G00
    Date: 2010–08–31
  3. By: Ralf Becker (University of Manchester); Adam Clements (QUT); Robert O'Neill (University of Manchester)
    Abstract: The forecasting of variance-covariance matrices is an important issue. In recent years an increasing body of literature has focused on multivariate models to forecast this quantity. This paper develops a nonparametric technique for generating multivariate volatility forecasts from a weighted average of historical volatility and a broader set of macroeconomic variables. As opposed to traditional techniques where the weights solely decay as a function of time, this approach employs a kernel weighting scheme where historical periods exhibiting the most similar conditions to the time at which the forecast if formed attract the greatest weight. It is found that the proposed method leads to superior forecasts, with macroeconomic information playing an important role.
    Keywords: Nonparametric, variance-covariance matrix, volatility forecasting, multivariate
    JEL: C14 C32 C53
    Date: 2010–10–28
  4. By: João Valle e Azevedo; Ana Pereira
    Abstract: We show how monetary aggregates can be usefully incorporated in forecasts of inflation. This requires fully disregarding the high-frequency fluctuations blurring the money/inflation relation, i.e., the projection of inflation onto monetary aggregates must be restricted to the low frequencies. Using the same tools, we show that money growth has (little) predictive power over output at business cycle frequencies.
    JEL: C51 E31 E32 E52 E58
    Date: 2010
  5. By: Sinha, Pankaj; Gupta, Sushant; Randev, Nakul
    Abstract: This paper examines the state of the Indian economy pre, during and post recession by analyzing various macro economic factors such as GDP, exchange rate, inflation, capital markets and fiscal deficit. We forecast some of the major economic variables using ARIMA modeling and present a picture of the Indian economy in the coming years. The findings indicate that Indian economy is reviving after a slowdown during the period of global recession. It is forecasted that GDP, foreign investments, fiscal deficit and capital markets will rise in 2010-11. Furthermore, the rupee-dollar exchange rate will not change much during the same period.
    Keywords: ARIMA; Box-Jenkins; Indian Economy; Forecasting
    JEL: B22 E00 C22 E37 C01
    Date: 2010–10–07
  6. By: Janine Aron; John Muellbauer
    Abstract: This paper presents new models for aggregate UK data on mortgage possessions(foreclosures) and mortgage arrears (payment delinquencies). The innovations include thetreatment of difficult to observe variations in loan quality and shifts in forbearance policy bylenders, by common latent variables estimated in a system of equations for arrears andpossessions, for quarterly data over 1983-2009. A second innovation is the theory-justifieduse of an estimate of the proportion of mortgages in negative equity, based on an averagedebt to equity ratio, as one of the key drivers of possessions and arrears. A third is thesystematic treatment of measurement bias in the months in arrears measures. Finally, thepaper does not impose a proportional long-run relationship between possessions and arrearsassumed in the previous UK literature. A range of economic forecast scenarios for forecaststo 2013 reveals the sensitivity of mortgage possessions and arrears to different economicconditions, highlighting potential risks faced by the UK and its mortgage lenders. Acomprehensive review of data on arrears and possessions completes the paper.
    Keywords: foreclosures, mortgage possessions, mortgage payment delinquencies, mortgage arrears,UK mortgage market, defaults, unobserved components model
    JEL: G21 G28 R21 C51 C53 E27
    Date: 2010–08
  7. By: Guglielmo Caporale; Davide Ciferri; Alessandro Girardi
    Abstract: We investigate the role of crude oil spot and futures prices in the process of price discovery by using a cost-of-carry model with an endogenous convenience yield and daily data over the period from January 1990 to December 2008. We provide evidence that futures markets play a more important role than spot markets in the case of contracts with shorter maturities, but the relative contribution of the two types of market turns out to be highly unstable, especially for the most deferred contracts. The implications of these results for hedging and forecasting crude oil spot prices are also discussed.
    Keywords: Cointegration, Oil market, Futures prices, Price Discovery.
    JEL: C32 C51 G13 G14
    Date: 2010–07–01
  8. By: Katsuhiko Muramiya (Research Institute for Economics and Business Administration, Kobe University); Tomomi Takada (Graduate School of Business Administration, Kobe University)
    Abstract: We examine the relationship between accuracy in management forecasts and the effectiveness of internal controls by using the unique setting in Japan, where disclosing management forecasts is effectively mandated. Feng et al. (2009) posit and find that managers of firms reporting internal control weaknesses under the Sarbanes–Oxley Act (SOX) report less accurate earnings forecasts compared with other firms in the U.S., where management forecasts are disclosed voluntarily. In line with this notion, our results show that firms disclosing internal control deficiencies and those restating financial highlights report less accurate management forecasts in the Japanese market, where the disclosure of management forecasts are effectively mandated. Furthermore, we find that manager’s optimistic biases cause such inaccurate management forecasts. Our results indicate that the effectiveness of internal controls has a significant impact on internal reports, which are used in forming forecasts; therefore, internal control weaknesses induce less accurate management forecasts.
    Date: 2010–11
  9. By: Berg, Nathan; Biele, Guido; Gigerenzer, Gerd
    Abstract: Subjective beliefs and behavior regarding the Prostate Specific Antigen (PSA) test for prostate cancer were surveyed among attendees of the 2006 meeting of the American Economic Association. Logical inconsistency was measured in percentage deviations from a restriction imposed by Bayes’ Rule on pairs of conditional beliefs. Economists with inconsistent beliefs tended to be more accurate than average, and consistent Bayesians were substantially less accurate. Within a loss function framework, we look for and cannot find evidence that inconsistent beliefs cause economic losses. Subjective beliefs about cancer risks do not predict PSA testing decisions, but social influences do.
    Keywords: logical consistency; predictive accuracy; elicitation; non-Bayesian; ecological rationality
    Date: 2010
  10. By: Guorui Bian; Michael McAleer (University of Canterbury); Wing-Keung Wong
    Abstract: In this paper, we develop a modified maximum likelihood (MML) estimator for the multiple linear regression model with underlying student t distribution. We obtain the closed form of the estimators, derive the asymptotic properties, and demonstrate that the MML estimator is more appropriate for estimating the parameters of the Capital Asset Pricing Model by comparing its performance with least squares estimators (LSE) on the monthly returns of US portfolios. The empirical results reveal that the MML estimators are more efficient than LSE in terms of the relative efficiency of one-step-ahead forecast mean square error in small samples.
    Keywords: Maximum likelihood estimators; Modified maximum likelihood estimators; Student t family; Capital asset pricing model; Robustness
    JEL: C1 C2 G1
    Date: 2010–10–01
  11. By: Beuselinck, C.A.C.; Joos, P.P.M.; Khurana, I.K.; Meulen, S. van der (Tilburg University, Center for Economic Research)
    Abstract: This study examines the properties of the information contained in analysts’ earnings forecasts for mandatory IFRS adopters in Europe for the period 2003-07. We find a significant increase in the precision of both public and private information after switching to IFRS, especially for forecasts pertaining to 2006 and later. However, we are unable to detect a change in the consensus among financial analysts after the mandatory adoption of IFRS. These results suggest that the higher percentage increase in the precision of common information is offset by a proportionate increase in the precision of private information such that consensus among analysts does not change. When exploring analyst-specific precision in more detail, we find that the analysts who are following firms in more than one European country experience the largest post-IFRS improvement in private information precision. These results hold after controlling for factors that are shown in prior research to be correlated with analysts’ information precision measures. Taken together, our results suggest that mandatory adoption of IFRS had a significant and positive effect on the information processing of financial analysts but this did not occur homogeneously across analysts.
    Keywords: IFRS;mandatory IFRS adoption;analyst forecasts;information environment.
    JEL: G15 M41
    Date: 2010

This nep-for issue is ©2010 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.