The state of macroeconomic forecasting

Macroeconomic forecasts are used extensively in industry and government The historical accuracy of US and UK forecasts are examined in the light of different approaches to evaluating macro forecasts. Issues discussed include the comparative accuracy of macroeconometric models compared to their time series alternatives, whether the forecasting record has improved over time, the rationality of macroeconomic forecasts and how a forecasting service should be chosen. The role of judgement in producing the forecasts is also considered where the evidence unequivocally favors such interventions. Finally the use of macroeconomic forecasts and their effectiveness is discussed. The conclusion drawn is that researchers have paid too little attention to the issue of improving the forecasting accuracy record. Areas where improvements would be particularly valuable are highlighted.

Newsvendor Conditional Value-at-Risk Minimisation with a Non-Parametric Approach

In the classical Newsvendor problem, one must determine the order quantity that maximises the expected profit. Some recent works have proposed an alternative approach, in which the goal is to minimise the conditional value-at-risk (CVaR), a very popular risk measure in financial risk management. Unfortunately, CVaR estimation involves considering observations with extreme values, which poses problems for both parametric and non-parametric methods. Indeed, parametric methods often underestimate the downside risk, which leads to significant losses in extreme cases. The existing non-parametric methods, on the other hand, are extremely computationally expensive for large instances. In this paper, we propose an alternative non-parametric approach to CVaR minimisation that uses only a small proportion of the data. Using both simulation and real-life case studies, we show that the proposed method can be very useful in practice, allowing the decision makers to suffer less downside loss in extreme cases while requiring reasonable computing effort

Can Conversations on Reddit Forecast Future Economic Uncertainty? An Interpretable Machine Learning Approach

In recent years, social media has become an indispensable source of information through which public attitudes, opinions, and concerns can be studied and quantified. This paper proposes an interpretable machine learning framework for predicting the Equity Market-related Economic Uncertainty Index using features generated from a popular discussion forum on Reddit. Our framework consists of a series of custom preprocessing and analytics methods, including BERTopic for latent topic identification and regularized linear models. Using our framework, we evaluate explanatory models with different configurations over a large corpus of Reddit posts belonging to the personal finance category. Our analysis generates valuable insights about discussion topics on Reddit and their efficacy in accurately predicting future economic uncertainty. The study demonstrates the potential of using social media data and interpretable machine learning to inform economic forecasting research

EmC-ICDSST 2019: 5th International Conference on Decision Support System Technology - ICDSST 2019 & EURO Mini Conference 2019 on "Decision Support Systems: Main Developments & Future Trends"

info:eu-repo/semantics/publishedVersio

Retail forecasting: research and practice

This paper first introduces the forecasting problems faced by large retailers, from the strategic to the operational, from the store to the competing channels of distribution as sales are aggregated over products to brands to categories and to the company overall. Aggregated forecasting that supports strategic decisions is discussed on three levels: the aggregate retail sales in a market, in a chain, and in a store. Product level forecasts usually relate to operational decisions where the hierarchy of sales data across time, product and the supply chain is examined. Various characteristics and the influential factors which affect product level retail sales are discussed. The data rich environment at lower product hierarchies makes data pooling an often appropriate strategy to improve forecasts, but success depends on the data characteristics and common factors influencing sales and potential demand. Marketing mix and promotions pose an important challenge, both to the researcher and the practicing forecaster. Online review information too adds further complexity so that forecasters potentially face a dimensionality problem of too many variables and too little data. The paper goes on to examine evidence on the alternative methods used to forecast product sales and their comparative forecasting accuracy. Many of the complex methods proposed have provided very little evidence to convince as to their value, which poses further research questions. In contrast, some ambitious econometric methods have been shown to outperform all the simpler alternatives including those used in practice. New product forecasting methods are examined separately where limited evidence is available as to how effective the various approaches are. The paper concludes with some evidence describing company forecasting practice, offering conclusions as to the research gaps but also the barriers to improved practice

Understanding the impacts of environmental, economic, and policy factors on developing economies

The first chapter of this dissertation studies the long-term effects of climate conditions during an individual's birth year on their life cycle. Drawing on data from the India Human Development Survey and monthly rainfall data from the Global Historical Climatology Network, the study focuses on adults born between 1965 and 1978. The analysis reveals that higher rainfall levels during the birth year are associated with improved socioeconomic outcomes in an individual's health, schooling, and income over time. However, the presence of birth-year rainfall volatility has a contrasting negative impact, with men experiencing a stronger effect compared to women due to pre-existing gender inequality in India. Notably, regions relying on rice farming show heightened susceptibility to the influence of rainfall on health and schooling during adulthood. These findings underscore the significance of early-life climate conditions, particularly the importance of adequate nutrition during infancy, in shaping an individual's long-term well-being. In the second chapter, we delve into the evaluation of the IMF's Structural Adjustment Programs (SAP) and their impact on the IMF's yearly growth predictions for member countries. The analysis centers on a dataset consisting of 158 countries during the period from 1990 to 2004. The Structural Adjustment Programs were implemented by the IMF in the early 1980s and required member countries to fulfill specific conditions to receive loan tranches. We find that the IMF tends to overestimate future growth in countries subjected to a higher number of SAP conditions. This research sheds light on the IMF's perception of SAP allocation and its implications for a country's future growth. The effectiveness of SAP remains a contentious topic, and these findings contribute valuable insights into how these programs may impact a country's economic prospects. In the third chapter, the impact of China's Cleaner Production Law on firm behavior and long-term investment decisions is studied using a Synthetic Difference-in-Differences (SDID) framework. We focus on the role of county governments' environmental budgets in shaping firms' investment decisions, highlighting the importance of effective monitoring mechanisms. Although the implementation of environmental laws resulted in changes in firm behavior, we did not find statistically significant reductions in pollution levels after the implementation of the law. This is owing to the fact that pollution levels are affected by multiple variables apart from manufacturing activities. We also run a battery of sensitivity tests to check the validity of our results and find that the main results are consistent across various frameworks

Survey of quantitative investment strategies in the Russian stock market : Special interest in tactical asset allocation

Russia’s financial markets have been an uncharted area when it comes to exploring the performance of investment strategies based on modern portfolio theory. In this thesis, we focus on the country’s stock market and study whether profitable investments can be made while at the same time taking uncertainties, risks, and dependencies into account. We also pay particular interest in tactical asset allocation. The benefit of this approach is that we can utilize time series forecasting methods to produce trading signals in addition to optimization methods. We use two datasets in our empirical applications. The first one consists of nine sectoral indices covering the period from 2008 to 2017, and the other includes altogether 42 stocks listed on the Moscow Exchange covering the years 2011 – 2017. The strategies considered have been divided into five sections. In the first part, we study classical and robust mean-risk portfolios and the modeling of transaction costs. We find that the expected return should be maximized per unit expected shortfall while simultaneously requiring that each asset contributes equally to the portfolio’s tail risk. Secondly, we show that using robust covariance estimators can improve the risk-adjusted returns of minimum variance portfolios. Thirdly, we note that robust optimization techniques are best suited for conservative investors due to the low volatility allocations they produce. In the second part, we employ statistical factor models to estimate higher-order comoments and demonstrate the benefit of the proposed method in constructing risk-optimal and expected utility-maximizing portfolios. In the third part, we utilize the Almgren–Chriss framework and sort the expected returns according to the assumed momentum anomaly. We discover that this method produces stable allocations performing exceptionally well in the market upturn. In the fourth part, we show that forecasts produced by VECM and GARCH models can be used profitably in optimizations based on the Black–Litterman, copula opinion pooling, and entropy pooling models. In the final part, we develop a wealth protection strategy capable of timing market changes thanks to the return predictions based on an ARIMA model. Therefore, it can be stated that it has been possible to make safe and profitable investments in the Russian stock market even when reasonable transaction costs have been taken into account. We also argue that market inefficiencies could have been exploited by structuring statistical arbitrage and other tactical asset allocation-related strategies.Venäjän rahoitusmarkkinat ovat olleet kartoittamatonta aluetta tutkittaessa moderniin portfolioteoriaan pohjautuvien sijoitusstrategioiden käyttäytymistä. Tässä tutkielmassa keskitymme maan osakemarkkinoihin ja tarkastelemme, voidaanko taloudellisesti kannattavia sijoituksia tehdä otettaessa samalla huomioon epävarmuudet, riskit ja riippuvuudet. Kiinnitämme erityistä huomiota myös taktiseen varojen kohdentamiseen. Tämän lähestymistavan etuna on, että optimointimenetelmien lisäksi voimme hyödyntää aikasarjaennustamisen menetelmiä kaupankäyntisignaalien tuottamiseksi. Empiirisissä sovelluksissa käytämme kahta data-aineistoa. Ensimmäinen koostuu yhdeksästä teollisuusindeksistä kattaen ajanjakson 2008–2017, ja toinen sisältää 42 Moskovan pörssiin listattua osaketta kattaen vuodet 2011–2017. Tarkasteltavat strategiat on puolestaan jaoteltu viiteen osioon. Ensimmäisessä osassa tarkastelemme klassisia ja robusteja riski-tuotto -portfolioita sekä kaupankäyntikustannusten mallintamista. Havaitsemme, että odotettua tuottoa on syytä maksimoida suhteessa odotettuun vajeeseen edellyttäen samalla, että jokainen osake lisää sijoitussalkun häntäriskiä yhtä suurella osuudella. Toiseksi osoitamme, että minimivarianssiportfolioiden riskikorjattuja tuottoja voidaan parantaa robusteilla kovarianssiestimaattoreilla. Kolmanneksi toteamme robustien optimointitekniikoiden soveltuvan parhaiten konservatiivisille sijoittajille niiden tuottamien matalan volatiliteetin allokaatioiden ansiosta. Toisessa osassa hyödynnämme tilastollisia faktorimalleja korkeampien yhteismomenttien estimoinnissa ja havainnollistamme ehdotetun metodin hyödyllisyyttä riskioptimaalisten sekä odotettua hyötyä maksimoivien salkkujen rakentamisessa. Kolmannessa osassa käytämme Almgren–Chrissin viitekehystä ja asetamme odotetut tuotot suuruusjärjestykseen oletetun momentum-anomalian mukaisesti. Havaitsemme, että menetelmä tuottaa vakaita allokaatioita menestyen erityisen hyvin noususuhdanteessa. Neljännessä osassa osoitamme, että VECM- että GARCH-mallien tuottamia ennusteita voidaan hyödyntää kannattavasti niin Black–Littermanin malliin kuin kopulanäkemysten ja entropian poolaukseenkin perustuvissa optimoinneissa. Viimeisessä osassa laadimme varallisuuden suojausstrategian, joka kykenee ajoittamaan markkinoiden muutoksia ARIMA-malliin perustuvien tuottoennusteiden ansiosta. Voidaan siis todeta, että Venäjän osakemarkkinoilla on ollut mahdollista tehdä turvallisia ja tuottavia sijoituksia myös silloin kun kohtuulliset kaupankäyntikustannukset on huomioitu. Toiseksi väitämme, että markkinoiden tehottomuutta on voitu hyödyntää suunnittelemalla tilastolliseen arbitraasiin ja muihin taktiseen varojen allokointiin pohjautuvia strategioita