Density forecasts from options prices
A recent development is the derivation of density forecasts from the information about market participants' perceptions of the underlying asset price distribution contained in option market data. Soderlind and Svensson 1997 describe how methods of extracting information about market expectations from asset prices for monetary policy purposes have developed from the estimation of expected means of future interest rates and exchange rates from forward rates to estimation of their complete...
Example 2
In this example, we consider the growth rate of U.S. quarterly real gross national product GNP from 1947.II to 1991.I that is, where Xt is the U.S. quarterly real GNP, seasonally adjusted and obtained from Citibase database. This series was analyzed by Tiao and Tsay 1994 , on which our report is based see also Potter, 1995 . Figure 20.3 shows the time plot of the U.S. GNP growth rate. The horizontal line denotes the zero growth rate. If linear models are employed, the AR 2 model xt 0.0041...
What are the main problems Do these have potential solutions
Clements and Hendry argue that the main problems that afflict economic forecasting arise from the things we don't know we don't know, and of these, shifts in deterministic terms might be the most pernicious. Other possible sources of forecast errors - such as misspecifying the stochastic components or uncertainty due to estimating their parameters - are likely to be less important. Potential solutions such as updating the models parameters, differencing to exploit the rapid adaptability of a...
Modeling and forecasting volatility skew and kurtosis
Density forecasting in finance can be viewed as beginning with the literature that aims to model and forecast volatility. The ARCH model of Engle 1982 models the conditional variance as a linear function of squares of past observations, and thus delivers forecasts with time-varying conditional variances. A Generalized ARCH 1, 1 process includes the lagged conditional variance and can be written with zero mean as where the standardized residual et is distributed identically and independently...
Preface
This book provides an accessible and comprehensive explanation of the art and science of macroeconomic forecasting. The various chapters have each been prepared by experts on their topic, with the common objective of describing the range of models, methods, and approaches to economic forecasting. There are contributions across the full breadth of the subject, bringing together in a single volume a range of contrasting approaches and views. Forecasting is a practical venture, and many of the...
Michael P Clements and David F Hendry
The chapters of this Companion address a wide range of issues and approaches to economic forecasting. We overview its material in terms of 11 key questions that might fruitfully be asked of any practical venture, but here specifically concern forecasting.1 3 How confident can we be in forecasts 4 How is forecasting done generally 5 How is forecasting done by economists 6 How can one measure the success or failure of forecasts 7 How does one analyze the properties of forecasting methods 8 What...