The Performance of SETAR models by Regime: A Conditional Evaluation of Interval and Density Forecasts

The aim of this paper is to analyse the out-of-sample performance of SETAR models using daily data for the Euro effective exchange rate. The evaluation is conducted on point, interval and density forecasts. The benchmark used for the comparison is a linear AR model for point forecast evaluation and a GARCH model for interval and density forecasts. In each case the models are evaluated unconditionally, over the whole forecast period, and conditionally, on the regimes of the SETAR models. The results show that, in general, the performance of the SETAR models improves significantly for the forecasts governed by the regime(s) with fewer observations. However, overall the GARCH model is better able to capture the distributional features of the series and to predict higher ordered moments.SETAR models, point forecasts, interval forecasts, density forecasts, Euro effective exchange rate

THE PERFORMANCE OF SETAR MODELS : A REGIME CONDITIONAL EVALUATION OF POINT, INTERVAL AND DENSITY FORECASTS

The aim of this paper is to analyse the out-of-sample performance of SETAR models relative to a linear AR and a GARCH model using daily data for the Euro effective exchange rate. The evaluation is conducted on point, interval and density forecasts, unconditionally, over the whole forecast period, and conditional on specific regimes. The results show that overall the GARCH model is better able to capture the distributional features of the series and to predict higher-order moments than the SETAR models. However, from the results there is also a clear indication that the performance of the SETAR models improves significantly conditional on being on specific regimes.SETAR models ; forecasting accuracy ; point forecasts ; MSFEs ; interval forecasts ; density forecasts ; Euro effective exchange rate

The expectations hypothesis of the term structure: evidence for Germany

In this paper we examine the expectations hypothesis of the term structure (EHT) using a newly constructed monthly database of zero coupon bond yields from the German Government bond market. We use data at the short end of the maturity spectrum (maturities less than two years) and employ two approaches to predict future movements in shorter-term interest rates: one based on the yield spread, the other based on the forward-spot rate spread. We find that for the period considered, 1985:2-1994:12, both spreads contain substantial information for predicting future interest rate movements. Moreover, the results are, in general, consistent with the implications of the EHT, as far as the value of the coefficient of the spread is concerned. This means that in Germany the spread can be used as an important indicator for the conduct of monetary policy

The performance of Setar Models: a regime conditional evaluation of point, interval and density forecasts

The aim of this paper is to analyse the out-of-sample performance of SETAR models relative to a linear AR and a GARCH model using daily data for the Euro effective exchange rate. The evaluation is conducted on point, interval and density forecasts, unconditionally, over the whole forecast period, and conditional on specific regimes. The results show that overall the GARCH model is better able to capture the distributional features of the series and to predict higher-order moments than the SETAR models. However, from the results there is also a clear indication that the performance of the SETAR models improves significantly conditional on being on specific regimes

The performance of SETAR models: a regime conditional evaluation of point, interval and density forecasts

The aim of this paper is to analyse the out-of-sample performance of SETAR models relative to a linear AR and a GARCH model using daily data for the Euro effective exchange rate. The evaluation is conducted on point, interval and density forecasts, unconditionally, over the whole forecast period, and conditional on specific regimes. The results show that overall the GARCH model is better able to capture the distributional features of the series and to predict higher-order moments than the SETAR models. However, from the results there is also a clear indication that the performance of the SETAR models improves significantly conditional on being on specific regimes

THE PROPERTIES OF SOME GOODNESS-OF-FIT TESTS

The properties of Pearson’s goodness-of-fit test, as used in density forecast evaluation, income distribution analysis and elsewhere, are analysed. The components-of-chi-squared or “Pearson analog” tests of Anderson (1994) are shown to be less generally applicable than was originally claimed. For the case of equiprobable classes, where the general components tests remain valid, a Monte Carlo study shows that tests directed towards skewness and kurtosis may have low power, due to differences between the class boundaries and the intersection points of the distributions being compared. The power of individual component tests can be increased by the use of nonequiprobable classes.Pearson’s Goodness-of-fit test ; Component tests ; Distributional assumptions ; Monte Carlo ; Normality ; Nonequiprobable partitions

Uncertainty and disagreement in economic prediction : the Bank of England Survey of External Forecasters

This article introduces a new source of survey data, namely the Bank of England Survey of External Forecasters. The survey collects point and density forecasts of inflation and GDP growth, and hence offers the opportunity of constructing direct measures of uncertainty. We present a simple statistical framework in which to define and interrelate measures of uncertainty and disagreement. The resulting measures are compared with other direct measures of uncertainty, nationally and internationally. A significant, sustained reduction in inflation uncertainty followed the 1997 granting of operational independence to the Bank of England to pursue a monetary policy of inflation targeting.Forecast surveys ; point forecasts ; density forecasts ; uncertainty ; disagreement

Tests of the expectations hypothesis and policy reaction to the term spread: some comparative evidence

The aim of this paper is to evaluate the impact of monetary policy in tests of the Expectations Hypothesis of the term structure of interest rates. We apply the model developed by McCallum (1994b), in which the Expectations Hypothesis interacts with a policy reaction function and with a time-varying term premium, to eight countries with different monetary policy stances, within the period 1985 to 1995. The results suggest the importance of the treatment of monetary policy in explaining the empirical performance of the Expectations Hypothesis. Amongst other results, we also find that the model performs better for some countries than others depending upon the monetary policy stance adopted

Evaluating a three-dimensional panel of point forecasts : the Bank of England survey of external forecasters

This article provides a first analysis of the forecasts of inflation and GDP growth obtained from the Bank of England's Survey of External Forecasters, considering both the survey average forecasts published in the quarterly Inflation Report, and the individual survey responses, recently made available by the Bank. These comprise a conventional incomplete panel dataset, with an additional dimension arising from the collection of forecasts at several horizons; both point forecasts and density forecasts are collected. The inflation forecasts show good performance in tests of unbiasedness and efficiency, albeit over a relatively calm period for the UK economy, and there is considerable individual heterogeneity. For GDP growth, inaccurate real-time data and their subsequent revisions are seen to cause serious difficulties for forecast construction and evaluation, although the forecasts are again unbiased. There is evidence that some forecasters have asymmetric loss functions

The expectations hypothesis of the term structure: evidence for Germany

In this paper we examine the expectations hypothesis of the term structure (EHT) using a newly constructed monthly database of zero coupon bond yields from the German Government bond market. We use data at the short end of the maturity spectrum (maturities less than two years) and employ two approaches to predict future movements in shorter-term interest rates: one based on the yield spread, the other based on the forward-spot rate spread. We find that for the period considered, 1985:2-1994:12, both spreads contain substantial information for predicting future interest rate movements. Moreover, the results are, in general, consistent with the implications of the EHT, as far as the value of the coefficient of the spread is concerned. This means that in Germany the spread can be used as an important indicator for the conduct of monetary policy