When are Direct Multi‐step and Iterative Forecasts Identical?

Although both direct multi‐step‐ahead forecasting and iterated one‐step‐ahead forecasting are two popular methods for predicting future values of a time series, it is not clear that the direct method is superior in practice, even though from a theoretical perspective it has lower mean squared error (MSE). A given model can be fitted according to either a multi‐step or a one‐step forecast error criterion, and we show here that discrepancies in performance between direct and iterative forecasting arise chiefly from the method of fitting, and is dictated by the nuances of the model's misspecification. We derive new formulas for quantifying iterative forecast MSE, and present a new approach for assessing asymptotic forecast MSE. Finally, the direct and iterative methods are compared on a retail series, which illustrates the strengths and weaknesses of each approach. Copyright © 2015 John Wiley & Sons, Ltd.     

Do Long‐Run Theory Restrictions Help in Forecasting?

Do long‐run equilibrium relations suggested by economic theory help to improve the forecasting performance of a cointegrated vector error correction model (VECM)? In this paper we try to answer this question in the context of a two‐country model developed for the Canadian and US economies. We compare the forecasting performance of the exactly identified cointegrated VECMs to the performance of the over‐identified VECMs with the long‐run theory restrictions imposed. We allow for model uncertainty and conduct this comparison for every possible combination of the cointegration ranks of the Canadian and US models. We show that the over‐identified structural cointegrated models generally outperform the exactly identified models in forecasting Canadian macroeconomic variables. We also show that the pooled forecasts generated from the over‐identified models beat most of the individual exactly identified and over‐identified models as well as the VARs in levels and in differences. Copyright © 2011 John Wiley & Sons, Ltd.     

Affine Term Structure Model with Macroeconomic Factors: Do No‐Arbitrage Restriction and Macroeconomic Factors Imply Better Out‐of‐Sample Forecasts?

This study extends the affine dynamic Nelson–Siegel model for the inclusion of macroeconomic variables. Five macroeconomic variables are included in affine term structure model, derived under the arbitrage‐free restriction, to evaluate their role in the in‐sample fitting and out‐of‐sample forecasting of the term structure. We show that the relationship between the macroeconomic factors and yield data has an intuitive interpretation, and that there is interdependence between the yield and macroeconomic factors. Moreover, the macroeconomic factors significantly improve the forecast performance of the model. The affine Nelson–Siegel type models outperform the benchmark simple time series forecast models. The out‐of‐sample predictability of the affine Nelson–Siegel model with macroeconomic factors for the short horizon is superior to the simple affine yield model for all maturities, and for longer horizons the former is still compatible to the latter, particularly for medium and long maturities. Copyright © 2015 John Wiley & Sons, Ltd.     

Do Experts’ SKU Forecasts Improve after Feedback?

We analyze the behavior of experts who quote forecasts for monthly SKU‐level sales data, where we compare data before and after the moment that experts received different kinds of feedback on their behavior. We have data for 21 experts located in as many countries who make SKU‐level forecasts for a variety of pharmaceutical products for October 2006 to September 2007. We study the behavior of the experts by comparing their forecasts with those from an automated statistical program, and we report the forecast accuracy over these 12 months. In September 2007 these experts were given feedback on their behavior and they received training at the headquarters office, where specific attention was given to the ins and outs of the statistical program. Next, we study the behavior of the experts for the 3 months after the training session, i.e. October 2007 to December 2007. Our main conclusion is that in the second period the experts’ forecasts deviated less from the statistical forecasts and that their accuracy improved substantially. Copyright © 2013 John Wiley & Sons, Ltd.     

The Predictive Power of Survey‐Based Exchange Rate Forecasts: Is there a Role for Dispersion?

Previous research has shown that the consensus of individual exchange rate forecasts performs no better than many commonly used forecasting models in predicting future exchange rates. Studies on equity and bond markets have explored the effects of dispersion in forecasts on the predictive power of forecasts; however, no earlier paper has investigated such effects in the context of the foreign exchange market. This study explores the role of consensus forecast dispersion as a factor leading to bias and anchoring in exchange rate forecasts. Our analysis of five currency pairs reveals that consensus forecasts mostly appear to be unbiased predictors of exchange rates in the long run, but most are unable to pass tests for short‐run unbiasedness. In three of the five currencies examined it appears that forecasters should take greater account of reported forecast dispersion. Copyright © 2015 John Wiley & Sons, Ltd.     

Term Structure Forecasting of Government Bond Yields with Latent and Macroeconomic Factors: Do Macroeconomic Factors Imply Better Out‐of‐Sample Forecasts?

This study empirically examines the role of macroeconomic and stock market variables in the dynamic Nelson–Siegel framework with the purpose of fitting and forecasting the term structure of interest rate on the Japanese government bond market. The Nelson–Siegel type models in state‐space framework considerably outperform the benchmark simple time series forecast models such as an AR(1) and a random walk. The yields‐macro model incorporating macroeconomic factors leads to a better in‐sample fit of the term structure than the yields‐only model. The out‐of‐sample predictability of the former for short‐horizon forecasts is superior to the latter for all maturities examined in this study, and for longer horizons the former is still compatible to the latter. Inclusion of macroeconomic factors can dramatically reduce the autocorrelation of forecast errors, which has been a common phenomenon of statistical analysis in previous term structure models. Copyright © 2013 John Wiley & Sons, Ltd.     

Daily FX Volatility Forecasts: Can the GARCH(1,1) Model be Beaten using High‐Frequency Data?

Volatility forecasting remains an active area of research with no current consensus as to the model that provides the most accurate forecasts, though Hansen and Lunde (2005) have argued that in the context of daily exchange rate returns nothing can beat a GARCH(1,1) model. This paper extends that line of research by utilizing intra‐day data and obtaining daily volatility forecasts from a range of models based upon the higher‐frequency data. The volatility forecasts are appraised using four different measures of ‘true’ volatility and further evaluated using regression tests of predictive power, forecast encompassing and forecast combination. Our results show that the daily GARCH(1,1) model is largely inferior to all other models, whereas the intra‐day unadjusted‐data GARCH(1,1) model generally provides superior forecasts compared to all other models. Hence, while it appears that a daily GARCH(1,1) model can be beaten in obtaining accurate daily volatility forecasts, an intra‐day GARCH(1,1) model cannot be. Copyright © 2011 John Wiley & Sons, Ltd.     

Is it a short‐memory,long‐memory,or permanently Granger‐causation influence?

Exploring the Granger‐causation relationship is an important and interesting topic in the field of econometrics. In the traditional model we usually apply the short‐memory style to exhibit the relationship, but in practice there could be other different influence patterns. Besides the short‐memory relationship, Chen (2006) demonstrates a long‐memory relationship, in which a useful approach is provided for estimation where the time series are not necessarily fractionally co‐integrated. In that paper two different relationships (short‐memory and long‐memory relationship) are regarded whereby the influence flow is decayed by geometric, or cutting off, or harmonic sequences. However, it limits the model to the stationary relationship. This paper extends the influence flow to a non‐stationary relationship where the limitation is on ?0.5 ≤ d ≤ 1.0 and it can be used to detect whether the influence decays off (?0.5 ≤ d < 0.5) or is permanent (0.5 ≤ d ≤ 1.0). Copyright © 2008 John Wiley & Sons, Ltd.     

Forecasting Aggregates with Disaggregate Variables: Does Boosting Help to Select the Most Relevant Predictors?

Including disaggregate variables or using information extracted from the disaggregate variables into a forecasting model for an economic aggregate may improve forecasting accuracy. In this paper we suggest using the boosting method to select the disaggregate variables, which are most helpful in predicting an aggregate of interest. We conduct a simulation study to investigate the variable selection ability of this method. To assess the forecasting performance a recursive pseudo‐out‐of‐sample forecasting experiment for six key euro area macroeconomic variables is conducted. The results suggest that using boosting to select relevant predictors is a feasible and competitive approach in forecasting an aggregate. Copyright © 2016 John Wiley & Sons, Ltd.     

Do experts' adjustments on model‐based SKU‐level forecasts improve forecast quality?

Model‐based SKU‐level forecasts are often adjusted by experts. In this paper we propose a statistical methodology to test whether these expert forecasts improve on model forecasts. Application of the methodology to a very large database concerning experts in 35 countries who adjust SKU‐level forecasts for pharmaceutical products in seven distinct categories leads to the general conclusion that expert forecasts are equally good at best, but are more often worse than model‐based forecasts. We explore whether this is due to experts putting too much weight on their contribution, and this indeed turns out to be the case. Copyright © 2009 John Wiley & Sons, Ltd.     

Does a lot help a lot? Forecasting stock returns with pooling strategies in a data‐rich environment

A variety of recent studies provide a skeptical view on the predictability of stock returns. Empirical evidence shows that most prediction models suffer from a loss of information, model uncertainty, and structural instability by relying on low‐dimensional information sets. In this study, we evaluate the predictive ability of various lately refined forecasting strategies, which handle these issues by incorporating information from many potential predictor variables simultaneously. We investigate whether forecasting strategies that (i) combine information and (ii) combine individual forecasts are useful to predict US stock returns, that is, the market excess return, size, value, and the momentum premium. Our results show that methods combining information have remarkable in‐sample predictive ability. However, the out‐of‐sample performance suffers from highly volatile forecast errors. Forecast combinations face a better bias–efficiency trade‐off, yielding a consistently superior forecast performance for the market excess return and the size premium even after the 1970s.     

Twisting the Dollar? On the Consistency of Short‐Run and Long‐Run Exchange Rate Expectations

We examine consistency properties of the exchange rate expectation formation process of short‐run and long‐run forecasts in the dollar/euro and yen/dollar market. Applying nonlinear consistency restrictions we show that in a simple expectation formation structure short‐run forecasts are indeed inconsistent with long‐run predictions. Moreover, we establish a ‘twist’ in the dollar/euro expectation formation process, i.e. market participants expect bandwagon effects in the short run, while they have stabilizing expectations in their long‐run forecasts. Applying a panel probit analysis we find that this twisting behavior is more likely to occur in periods of excess exchange rate volatility. Copyright © 2011 John Wiley & Sons, Ltd.     

Why do regime‐switching models forecast so badly?

Most non‐linear techniques give good in‐sample fits to exchange rate data but are usually outperformed by random walks or random walks with drift when used for out‐of‐sample forecasting. In the case of regime‐switching models it is possible to understand why forecasts based on the true model can have higher mean squared error than those of a random walk or random walk with drift. In this paper we provide some analytical results for the case of a simple switching model, the segmented trend model. It requires only a small misclassification, when forecasting which regime the world will be in, to lose any advantage from knowing the correct model specification. To illustrate this we discuss some results for the DM/dollar exchange rate. We conjecture that the forecasting result is more general and describes limitations to the use of switching models for forecasting. This result has two implications. First, it questions the leading role of the random walk hypothesis for the spot exchange rate. Second, it suggests that the mean square error is not an appropriate way to evaluate forecast performance for non‐linear models. Copyright © 1999 John Wiley & Sons, Ltd.     

Short‐term forecasts of economic activity: Are fortnightly factors useful?

A short‐term mixed‐frequency model is proposed to estimate and forecast Italian economic activity fortnightly. We introduce a dynamic one‐factor model with three frequencies (quarterly, monthly, and fortnightly) by selecting indicators that show significant coincident and leading properties and are representative of both demand and supply. We conduct an out‐of‐sample forecasting exercise and compare the prediction errors of our model with those of alternative models that do not include fortnightly indicators. We find that high‐frequency indicators significantly improve the real‐time forecasts of Italian gross domestic product (GDP); this result suggests that models exploiting the information available at different lags and frequencies provide forecasting gains beyond those based on monthly variables alone. Moreover, the model provides a new fortnightly indicator of GDP, consistent with the official quarterly series.     

Why do EMD‐based methods improve prediction? A multiscale complexity perspective

Empirical mode decomposition (EMD)‐based ensemble methods have become increasingly popular in the research field of forecasting, substantially enhancing prediction accuracy. The key factor in this type of method is the multiscale decomposition that immensely mitigates modeling complexity. Accordingly, this study probes this factor and makes further innovations from a new perspective of multiscale complexity. In particular, this study quantitatively investigates the relationship between the decomposition performance and prediction accuracy, thereby developing (1) a novel multiscale complexity measurement (for evaluating multiscale decomposition), (2) a novel optimized EMD (OEMD) (considering multiscale complexity), and (3) a novel OEMD‐based forecasting methodology (using the proposed OEMD in multiscale analysis). With crude oil and natural gas prices as samples, the empirical study statistically indicates that the forecasting capability of EMD‐based methods is highly reliant on the decomposition performance; accordingly, the proposed OEMD‐based methods considering multiscale complexity significantly outperform the benchmarks based on typical EMDs in prediction accuracy.     

Comparison of forecasting performances: Does normalization and variance stabilization method beat GARCH(1,1)‐type models? Empirical evidence from the stock markets

In this paper, we present a comparison between the forecasting performances of the normalization and variance stabilization method (NoVaS) and the GARCH(1,1), EGARCH(1,1) and GJR‐GARCH(1,1) models. Hence the aim of this study is to compare the out‐of‐sample forecasting performances of the models used throughout the study and to show that the NoVaS method is better than GARCH(1,1)‐type models in the context of out‐of sample forecasting performance. We study the out‐of‐sample forecasting performances of GARCH(1,1)‐type models and NoVaS method based on generalized error distribution, unlike normal and Student's t‐distribution. Also, what makes the study different is the use of the return series, calculated logarithmically and arithmetically in terms of forecasting performance. For comparing the out‐of‐sample forecasting performances, we focused on different datasets, such as S&P 500, logarithmic and arithmetic B?ST 100 return series. The key result of our analysis is that the NoVaS method performs better out‐of‐sample forecasting performance than GARCH(1,1)‐type models. The result can offer useful guidance in model building for out‐of‐sample forecasting purposes, aimed at improving forecasting accuracy.     

How Predictable Are Equity Covariance Matrices? Evidence from High‐Frequency Data for Four Markets

Most pricing and hedging models rely on the long‐run temporal stability of a sample covariance matrix. Using a large dataset of equity prices from four countries—the USA, UK, Japan and Germany—we test the stability of realized sample covariance matrices using two complementary approaches: a standard covariance equality test and a novel matrix loss function approach. Our results present a pessimistic outlook for equilibrium models that require the covariance of assets returns to mean revert in the long run. We find that, while a daily first‐order Wishart autoregression is the best covariance matrix‐generating candidate, this non‐mean‐reverting process cannot capture all of the time series variation in the covariance‐generating process. Copyright © 2014 John Wiley & Sons, Ltd.     

How successful are dynamic factor models at forecasting output and inflation? A meta‐analytic approach

This paper uses a meta‐analysis to survey existing factor forecast applications for output and inflation and assesses what causes large factor models to perform better or more poorly at forecasting than other models. Our results suggest that factor models tend to outperform small models, whereas factor forecasts are slightly worse than pooled forecasts. Factor models deliver better predictions for US variables than for UK variables, for US output than for euro‐area output and for euro‐area inflation than for US inflation. The size of the dataset from which factors are extracted positively affects the relative factor forecast performance, whereas pre‐selecting the variables included in the dataset did not improve factor forecasts in the past. Finally, the factor estimation technique may matter as well. Copyright © 2008 John Wiley & Sons, Ltd.     

Real‐time or current vintage: does the type of data matter for forecasting and model selection?

In this paper we investigate the impact of data revisions on forecasting and model selection procedures. A linear ARMA model and nonlinear SETAR model are considered in this study. Two Canadian macroeconomic time series have been analyzed: the real‐time monetary aggregate M3 (1977–2000) and residential mortgage credit (1975–1998). The forecasting method we use is multi‐step‐ahead non‐adaptive forecasting. Copyright © 2008 John Wiley & Sons, Ltd.     

Are industry‐level indicators more helpful to forecast industrial stock volatility? Evidence from Chinese manufacturing purchasing managers index

Effectively explaining and accurately forecasting industrial stock volatility can provide crucial references to develop investment strategies, prevent market risk and maintain the smooth running of national economy. This paper aims to discuss the roles of industry‐level indicators in industrial stock volatility. Selecting Chinese manufacturing purchasing managers index (PMI) and its five component PMI as the proxies of industry‐level indicators, we analyze the contributions of PMI on industrial stock volatility and further compare the volatility forecasting performances of PMI, macroeconomic fundamentals and economic policy uncertainty (EPU), by constructing the individual and combination GARCH‐MIDAS models. The empirical results manifest that, first, most of the PMI has significant negative effects on industrial stock volatility. Second, PMI which focuses on the industrial sector itself is more helpful to forecast industrial stock volatility compared with the commonly used macroeconomic fundamentals and economic policy uncertainty. Finally, the combination GARCH‐MIDAS approaches based on DMA technique demonstrate more excellent predictive abilities than the individual GARCH‐MIDAS models. Our major conclusions are robust through various robustness checks.