nep-for New Economics Papers
on Forecasting
Issue of 2023‒05‒01
three papers chosen by
Rob J Hyndman
Monash University

  1. Bayesian Forecasting in the 21st Century: A Modern Review By Gael M. Martin; David T. Frazier; Ruben Loaiza-Maya; Florian Huber; Gary Koop; John Maheu; Didier Nibbering; Anastasios Panagiotelis
  2. Financial Time Series Forecasting using CNN and Transformer By Zhen Zeng; Rachneet Kaur; Suchetha Siddagangappa; Saba Rahimi; Tucker Balch; Manuela Veloso
  3. Explaining Exchange Rate Forecasts with Macroeconomic Fundamentals Using Interpretive Machine Learning By Davood Pirayesh Neghab; Mucahit Cevik; M. I. M. Wahab

  1. By: Gael M. Martin; David T. Frazier; Ruben Loaiza-Maya; Florian Huber; Gary Koop; John Maheu; Didier Nibbering; Anastasios Panagiotelis
    Abstract: The Bayesian statistical paradigm provides a principled and coherent approach to probabilistic forecasting. Uncertainty about all unknowns that characterize any forecasting problem -- model, parameters, latent states -- is factored into the forecast distribution, with forecasts conditioned only on what is known or observed. Allied with the elegance of the method, Bayesian forecasting is now underpinned by the burgeoning field of Bayesian computation, which enables Bayesian forecasts to be produced for virtually any problem, no matter how large, or complex. The current state of play in Bayesian forecasting is the subject of this review. The aim is to provide readers with an overview of modern approaches to the field, set in some historical context. Whilst our primary focus is on applications in the fields of economics and finance, and their allied disciplines, sufficient general details about implementation are provided to aid and inform all investigators.
    Keywords: Bayesian prediction, macroeconomics, finance, marketing, electricity demand, Bayesian computational methods, loss-based Bayesian prediction
    JEL: C01 C11 C53
    Date: 2023
  2. By: Zhen Zeng; Rachneet Kaur; Suchetha Siddagangappa; Saba Rahimi; Tucker Balch; Manuela Veloso
    Abstract: Time series forecasting is important across various domains for decision-making. In particular, financial time series such as stock prices can be hard to predict as it is difficult to model short-term and long-term temporal dependencies between data points. Convolutional Neural Networks (CNN) are good at capturing local patterns for modeling short-term dependencies. However, CNNs cannot learn long-term dependencies due to the limited receptive field. Transformers on the other hand are capable of learning global context and long-term dependencies. In this paper, we propose to harness the power of CNNs and Transformers to model both short-term and long-term dependencies within a time series, and forecast if the price would go up, down or remain the same (flat) in the future. In our experiments, we demonstrated the success of the proposed method in comparison to commonly adopted statistical and deep learning methods on forecasting intraday stock price change of S&P 500 constituents.
    Date: 2023–04
  3. By: Davood Pirayesh Neghab; Mucahit Cevik; M. I. M. Wahab
    Abstract: The complexity and ambiguity of financial and economic systems, along with frequent changes in the economic environment, have made it difficult to make precise predictions that are supported by theory-consistent explanations. Interpreting the prediction models used for forecasting important macroeconomic indicators is highly valuable for understanding relations among different factors, increasing trust towards the prediction models, and making predictions more actionable. In this study, we develop a fundamental-based model for the Canadian-U.S. dollar exchange rate within an interpretative framework. We propose a comprehensive approach using machine learning to predict the exchange rate and employ interpretability methods to accurately analyze the relationships among macroeconomic variables. Moreover, we implement an ablation study based on the output of the interpretations to improve the predictive accuracy of the models. Our empirical results show that crude oil, as Canada's main commodity export, is the leading factor that determines the exchange rate dynamics with time-varying effects. The changes in the sign and magnitude of the contributions of crude oil to the exchange rate are consistent with significant events in the commodity and energy markets and the evolution of the crude oil trend in Canada. Gold and the TSX stock index are found to be the second and third most important variables that influence the exchange rate. Accordingly, this analysis provides trustworthy and practical insights for policymakers and economists and accurate knowledge about the predictive model's decisions, which are supported by theoretical considerations.
    Date: 2023–03

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