nep-for New Economics Papers
on Forecasting
Issue of 2011‒11‒28
eleven papers chosen by
Rob J Hyndman
Monash University

  1. Predicting Recessions: A New Approach For Identifying Leading Indicators and Forecast Combinations By Turgut Kisinbay; Chikako Baba
  2. Do Commodity Futures Help Forecast Spot Prices? By Shaun K. Roache; David A Reichsfeld
  3. Financial stress and economic activity in Germany and the Euro Area By Björn van Roye
  4. In-Sample and Out-of-Sample Prediction of Stock Market Bubbles: Cross-Sectional Evidence By Helmut Herwartz; Konstantin A. Kholodilin
  5. Exchange Rates and Individual Good’s Price Misalignment: Some Preliminary Evidence of Long-Horizon Predictability By Wei Dong; Deokwoo Nam
  6. Individual exchange rate forecasts and expected fundamentals By Dick, Christian D.; MacDonald, Ronald; Menkhoff, Lukas
  8. Decomposing the predictive performance of the moving average trading rule of technical analysis: the contribution of linear and non linear dependencies in stock returns By Alexandros E. Milionis; Evangelia Papanagiotou
  9. The Forward Discount Puzzle: Identication of Economic Assumptions By Seongman Moon; Carlos Velasco
  10. A BI-LEVEL SCHEME FOR ASSESSING THE IMPACT OF AIR TRANSPORTATION ON LOCAL DEVELOPMENT By Marcella Drummond; Felix Mora-Camino; Luis Gustavo Cruz; Amaranto Pereira
  11. On the Properties of Regression Tests of Asset Return Predictability By Seongman Moon; Carlos Velasco

  1. By: Turgut Kisinbay; Chikako Baba
    Abstract: This study proposes a data-based algorithm to select a subset of indicators from a large data set with a focus on forecasting recessions. The algorithm selects leading indicators of recessions based on the forecast encompassing principle and combines the forecasts. An application to U.S. data shows that forecasts obtained from the algorithm are consistently among the best in a large comparative forecasting exercise at various forecasting horizons. In addition, the selected indicators are reasonable and consistent with the standard leading indicators followed by many observers of business cycles. The suggested algorithm has several advantages, including wide applicability and objective variable selection.
    Keywords: Business cycles , Economic forecasting , Economic indicators , Economic recession , Forecasting models , United States ,
    Date: 2011–10–13
  2. By: Shaun K. Roache; David A Reichsfeld
    Abstract: We assess the spot price forecasting performance of 10 commodity futures at various horizons up to two years and test whether this performance is affected by market conditions. We reject efficient markets based on in-sample tests but, out-of-sample, we find that the forecast from the futures market is hard to beat. We find that the forecasting performance of futures does not depend on the slope of the futures curve, in contrast to the predictions of well-known models of commodity markets. We also find futures’ forecasting performance to be invariant to whether prices are in an upswing or downswing, casting doubt on aspersions that uninformed investors participating during bull markets impede the price discovery process.
    Keywords: Commodity markets , Commodity prices , Economic forecasting , Forecasting models ,
    Date: 2011–11–03
  3. By: Björn van Roye
    Abstract: The financial crisis 2008-2009 and the European sovereign debt crisis have shown that stress on financial markets is important for analyzing and forecasting economic activity. Since financial stress is not directly observable but is presumably reflected in many financial market variables, it is useful to derive an indicator summarizing the stress component of these variables. Therefore, I derive a financial market stress indicator (FMSI) for Germany and the Euro Area using a dynamic approximate factor model. Subsequently, applying these indicators, I analyse the effects of financial stress on economic activity in a small Bayesian VAR model. An increase in financial stress leads to a significant dampening of GDP growth and the inflation rate. Additionally, there is a substantial and persistent decline in short-term nominal interest rates. I find that about fifteen percent of variation in real GDP growth can be accounted for variations in financial stress for Germany and about 30 percent in the Euro Area. I show that the inclusion of the indicator significantly improves out-of-sample forecasting accuracy for real GDP growth in Germany compared to a model without the indicator and other forecast benchmarks
    Keywords: Forecasting, Financial stress indicator, Financial Systems, Recessions, Slowdowns, Financial Crises
    JEL: E5 E6 F3 G2 G14
    Date: 2011–11
  4. By: Helmut Herwartz; Konstantin A. Kholodilin
    Abstract: We evaluate the informational content of ex post and ex ante predictors of periods of excess stock (market) valuation. For a cross section comprising 10 OECD economies and a time span of at most 40 years alternative binary chronologies of price bubble periods are determined. Using these chronologies as dependent processes and a set of macroeconomic and financial variables as explanatory variables, logit regressions are carried out. With model estimates at hand, both in-sample and out-of-sample forecasts are made. Overall, the degree of ex ante predictability is limited if an analyst targets the detection of particular turning points of market valuation. The set of 13 potential predictors is classified in measures of macroeconomic or monetary performance, stock market characteristics, and descriptors of capital valuation. The latter turn out to have strongest in-sample and out-of-sample explanatory content for the emergence of price bubbles. In particular, the price to book ratio is fruitful to improve the ex-ante signalling of stock price bubbles.
    Keywords: Stock market bubbles, out-of-sample forecasting, financial ratios, OECD countries
    JEL: E27
    Date: 2011
  5. By: Wei Dong; Deokwoo Nam
    Abstract: When prices are sticky, movements in the nominal exchange rate have a direct impact on international relative prices. A relative price misalignment would trigger an adjustment in consumption and employment, and may help to predict future movements in the exchange rate. Although purchasing-power-parity fundamentals, in general, have only weak predictability, currency misalignment may be indicated by price differentials for some goods, which could then have predictive power for subsequent re-evaluation of the nominal exchange rate. The authors collect good-level price data to construct deviations from the law of one price and examine the resulting price-misalignment model’s predictive power for the nominal exchange rates between the U.S. dollar and two other currencies: the Japanese yen and the U.K. pound. To account for small-sample bias and data-mining issues, inference is drawn from bootstrap distributions and tests of superior predictive ability (SPA) are performed. The slope coefficients and R-squares increase with the forecast horizon for the bilateral exchange rates between the U.S. dollar and the Japanese yen and the U.S. dollar and the U.K. pound. The out-of-sample SPA tests suggest that the authors’ price-misalignment model outperforms random walks either with or without drift for the U.S. dollar vis-à-vis the Japanese yen at the 5 per cent level of significance over long horizons.
    Keywords: Exchange rates; International topics
    JEL: F31 F47
    Date: 2011
  6. By: Dick, Christian D.; MacDonald, Ronald; Menkhoff, Lukas
    Abstract: This paper suggests that exchange rates are related to economic fundamentals over medium-term horizons, such as a month or longer. We find from a large panel of individual professionals' forecasts that good exchange rate forecasts benefit from the proper understanding of fundamentals, specifically good interest rate forecasts. This relation is robust to individual fixed effects and further controls. Reassuringly, this relation is stronger during obvious fundamental misalignment. This occurs when exchange rates substantially deviate from their PPP values, when interest rate differentials are high and when exchange rates are less influenced by strong momentum. --
    Keywords: Exchange Rate Determination,Individual Expectations,Macroeconomic Fundamentals
    JEL: F31 F37 E44
    Date: 2011
  7. By: Dr. Wan Fauziah Wan Yusoff (Faculty of Technology Management and Business, Universiti Tun Hussein Onn Malaysia); Prof. Dr. Anona Amrstrong (Victoria Law School, Faculty of Business and Law, Victoria University, Australia)
    Abstract: Directors’ competencies are seeing to be of importance to corporate governance. As this issue has not yet being studied extensively in Malaysia, this study determines the key competencies of Malaysian company’s directors using qualitative approach involving two stages of Delphi Technique. In the first stage all information pertaining to directors’ competences in the literature had been reviewed. In the second stage, the key competencies identified in stage one were the criteria for developing a semi structured questionnaire. Participants were asked to rank the competencies in term of their importance for directors’ performance. Based on personel interviews with 41 participants eight types of competencies were found to be essential for Malaysian companies’ directors. Financial competencies received the highest responses, followed by corporate planning, business forecasting, legal, risk management, marketing, human resource and international business. This paper provides important evidence to support the conclusions drawn from the study about the importance of relevant directors’ competencies for board and corporate effectiveness
    Keywords: Competencies, company directors, board effectiveness, corporate governance
    JEL: M0
    Date: 2011–10
  8. By: Alexandros E. Milionis (Bank of Greece and University of Aegean); Evangelia Papanagiotou (University of the Aegean)
    Abstract: On several occasions technical analysis rules have been shown to have predictive power. The main purpose of this work is to decompose the predictive power of the moving average trading rule and isolate the portion that could be attributed to the possible exploitation of linear and non linear dependencies in stock returns. Data for the General Index of the Athens Stock Exchange are filtered using linear filters so that the resulting simulated “returns” exhibit no serial correlation. Applying moving average trading rules to both the original and the simulated indices and using a statistical testing procedure that takes into account the sensitivity of the performance of the trading rule as a function of moving average length, it is found that the predictive power of the trading rule is clearly weakened when applied to the simulated index indicating that a substantial part of the rule’s predictive power is due to the exploitation of linear dependencies in stock returns. It is also found that the contribution of linear dependencies in stock returns to the performance of the trading rule is increased for shorter moving average lengths.
    Keywords: Market Efficiency; Technical Analysis; Moving Average Trading Rules; Athens Stock Exchange.
    JEL: G14 G15 C2
    Date: 2011–07
  9. By: Seongman Moon (Universidad Carlos III de Madrid); Carlos Velasco (Universidad Carlos III de Madrid)
    Abstract: The forward discount puzzle refers to the robust empirical finding that foreign excess returns are predictable. We investigate if expectations errors are the main cause of this predictability using the serial dependence pattern of excess returns implied by economic models as identification device. This approach also allows us to explain why strong predictability of excess returns only occurs during 1980s. Using USD bilateral spot and forward rates from 1975-2009, we show that both the statistically significant positive serial dependence of excess returns in the entire sample and the very weak (mostly insignificant) positive serial dependence in the subsample excluding observations in 1980-87 are consistent with the predictions of the expectations errors explanation. We provide several pieces of new empirical evidence which support the link between the strong predictability in the 1980s and changes in forecasting techniques by foreign exchange market agents.
    Keywords: expectations errors, rational expectations risk premium, excess returns, serial dependence, 1980-87.
    JEL: F31 G14
    Date: 2011–01
  10. By: Marcella Drummond; Felix Mora-Camino; Luis Gustavo Cruz; Amaranto Pereira
    Abstract: An approach to assess the impact of the creation or expansion of an air transport infrastructure over regional development is proposed in this paper. Effective long term planning of this costly investment requires performing an overall analysis of socio-economic consequences through long term forecasting, scenario generation and risk analysis. One of main aspects of this task is related with the estimation of future demand over the modified transportation network which attends the considered region. The proposed approach makes use of two complementary models: One model is devoted to demand forecasting taking into account the modified accessibility of the multimodal transportation network, the other one defines the global transport supply according to a profit maximization behavior for the involved transport system. The demand forecasting process is based on an entropy maximization approach with flexible origin-destination levels to determine the intensity and the distribution of new origin-destination vectors. A two level solution technique considering vehicle flows at the first level and the payload/passengers flows at the second level is introduced. The proposed solution scheme is composed of an iterative process between the current solution for demand forecasting and the supply optimization problem: the entropy maximizing distribution problem provides the origin-destination matrix given a cost/capacity structure, while the supply optimization problem provides this cost/capacity structure resulting from the accessibility level, given the updated origin-destination vectors. The proposed approach is illustrated in the case of a fast developing rural agro-industrial area in central Brazil, where the consequences of the installation of a medium size airport are assessed.
    Date: 2011–09
  11. By: Seongman Moon (Universidad Carlos III de Madrid); Carlos Velasco (Universidad Carlos III de Madrid)
    Abstract: This paper investigates, both in finite samples and asymptotically, statistical inference on predictive regressions where time series are generated by present value models of asset prices. We show that regression-based tests, including robust tests such as robust conditional test and Q-test, are inconsistent and thus suffer from lack of power in local-to-unity models for the regressor persistence. The main reason is that the near-integrated regressor from the present value model slows down the convergence rates of the estimates, an effect which is masked in predictive regressions analysis with exogenous constant covariance of innovations. We illustrate these properties in a simulation study and analyze the predictability of several stock returns series.
    Keywords: present value model, predictive regression, local-to-unity assumption, conditional test, Q-test, t-test.
    JEL: C12 C22 G1
    Date: 2011–08

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