Combining Forecasts Based on Multiple Encompassing Tests in a Macroeconomic Core System

We investigate whether and to what extent multiple encompassing tests may help determine weights for forecast averaging in a standard vector autoregressive setting. To this end we consider a new test-based procedure, which assigns non-zero weights to candidate models that add information not covered by other models. The potential benefits of this procedure are explored in extensive Monte Carlo simulations using realistic designs that are adapted to U.K. and to French macroeconomic data. The real economic growth rates of these two countries serve as the target series to be predicted. Generally, we find that the test-based averaging of forecasts yields a performance that is comparable to a simple uniform weighting of individual models. In one of our role-model economies, test-based averaging achieves some advantages in small samples. In larger samples, pure prediction models outperform forecast averages.Combining forecasts, encompassing tests, model selection, time series

Forecast Combination Based on Multiple Encompassing Tests in a Macroeconomic DSGE System

We use data generated by a macroeconomic DSGE model to study the relative benefits of forecast combinations based on forecast-encompassing tests relative to simple uniformly weighted forecast averages across rival models. Assumed rival models are four linear autoregressive specifications, one of them a more sophisticated factor-augmented vector autoregression (FAVAR). The forecaster is assumed not to know the true data-generating DSGE model. The results critically depend on the prediction horizon. While one-step prediction hardly supports test-based combinations, the test-based procedure attains a clear lead at prediction horizons greater than two.Combining forecasts, encompassing tests, model selection, time series, DSGE model

Will oil prices decline over the long run?

At present, oil markets appear to be behaving in a fashion similar to that in the late 1970s and early 1980s when oil prices rose sharply over an extended period. Furthermore, like at that time, analysts are split on whether such increases will persist or reverse, and if so by how much. The present paper argues that the similarities between the two episodes are not as strong as they might appear at first sight, and that the likelihood of sharp reversals in prices is not particularly great. There are a number of reasons in support of the view that it is unlikely that the first two decades of this century will mimic the last two decades of the previous century. First, oil demand is likely to grow significantly in line with strong economic growth in non-OECD countries. Second, on the supply side, OPEC is likely to enhance its control over markets over the next two decades, as supply increases in newly opened areas will only partially offset declining rates of production in other geologically mature non-OPEC oil regions. Moreover, while concerns about climate change will spur global efforts to reduce carbon emissions, these efforts are not expected to reduce oil demand. Finally, although there is much talk about alternative fuels, few of these are economically viable at the prices currently envisioned, and given the structural impediments, there is a reduced likelihood that the market will be able to generate sufficient quantities of these alternative fuels over the forecast horizon. The above factors imply that oil prices are likely to continue to exceed the USD 70 to USD 90 range over the long term. JEL Classification: Q41, Q42, Q43Oil prices, Oil supply, Oil demand, Alternative fuels, Climate Change Policy

Key elements of global inflation

Against the background of large fluctuations in world commodity prices and global growth, combined with ongoing structural changes relating to globalization, this paper examines some of the key factors affecting global inflation. The paper empirically investigates various relative price and structural impacts on global inflation by: estimating a GVAR to examine how oil price shocks feed through to core and headline inflation; calculating the impact of increased imports from low-cost countries on manufacturing import prices; estimating Phillips curves in order to shed light on whether the inflationary process in the OECD countries has changed over time, particularly with respect to the roles of import prices, unit labour costs and the output gap. Overall, the paper finds that there seem to be various significant pressures on global trade prices and labour markets associated with structural factors possibly partly due to globalisation which, in addition to monetary policy, seem to be behind some of the changes in the inflation process over the period examined in this paper.Phillips Curve, inflation, output gap, import prices, unit labour costs, globalisation, monetary policy.

Understanding Automation Surprise: Analysis of ASRS Reports

Pilots are frequently surprised by aircraft automation. These include cases in which the automation: 1) produces alerts to anomalies, 2) commands unexpected control manipulations (that may result in flight path deviations), or 3) simply disconnects. Aviation Safety Reporting System (ASRS) reports in which pilots indicated that automation produced unexpected actions were analyzed. Three general conclusions were drawn. First, many factors precipitate automation surprises. These include problems in: the auto-flight system and associated displays and interfaces, other aircraft sensors and systems, and interactions with weather and ATC. Second, inappropriate pilot actions are involved in a large proportion of these events. Third, recovery need not require reversion to manual control. There is no single general intervention that can prevent automation surprise or completely mitigate its effects. However, several different tacks (including improved training, displays, and coordination with ATC) taken together may be effective

An evaluation of financial institutions: Impact on consumption and investment using panel data and the theory of risk-bearing

The theory of the optimal allocation of risk and the Townsend Thai panel data on financial transactions are used to assess the impact of the major formal and informal financial institutions of an emerging market economy. We link financial institution assessment to the actual impact on clients, rather than ratios and non-performing loans. We derive both consumption and investment equations from a common core theory with both risk and productive activities. The empirical specification follows closely from this theory and allows both OLS and IV estimation. We thus quantify the consumption and investment smoothing impact of financial institutions on households including those running farms and small businesses. A government development bank (BAAC) is shown to be particularly helpful in smoothing consumption and investment, in no small part through credit, consistent with its own operating system, which embeds an implicit insurance operation. Commercial banks are smoothing investment, largely through formal savings accounts. Other institutions seem ineffective by these metrics

Light-Front Holography and Hadronization at the Amplitude Level

The correspondence between theories in anti-de Sitter space and conformal field theories in physical space-time leads to an analytic, semiclassical model for strongly-coupled QCD which has scale invariance at short distances and color confinement at large distances. Light-front holography is a remarkable feature of AdS/CFT: it allows hadronic amplitudes in the AdS fifth dimension to be mapped to frame-independent light-front wavefunctions of hadrons in physical space-time, thus providing a relativistic description of hadrons at the amplitude level. Some novel features of QCD are discussed, including the consequences of confinement for quark and gluon condensates and the behavior of the QCD coupling in the infrared. We suggest that the spatial support of QCD condensates is restricted to the interior of hadrons, since they arise due to the interactions of confined quarks and gluons. Chiral symmetry is thus broken in a limited domain of size of the inverse pion mass in analogy to the limited physical extent of superconductor phases. A new method for computing the hadronization of quark and gluon jets at the amplitude level, an event amplitude generator, is outlined.Comment: Presented by SJB at the Sixth International Conference on Perspectives in Hadronic Physics, 12 - 16 May 2008, Miramare - Trieste, Ital

Decision-making in drug development using a composite definition of success

Evidence-based quantitative methodologies have been proposed to inform decision-making in drug development, such as metrics to make go/no-go decisions or predictions of success, identified with statistical significance of future clinical trials. While these methodologies appropriately address some critical questions on the potential of a drug, they either consider the past evidence without predicting the outcome of the future trials or focus only on efficacy, failing to account for the multifaceted aspects of a successful drug development. As quantitative benefit-risk assessments could enhance decision-making, we propose a more comprehensive approach using a composite definition of success based not only on the statistical significance of the treatment effect on the primary endpoint but also on its clinical relevance and on a favorable benefit-risk balance in the next pivotal studies. For one drug, we can thus study several development strategies before starting the pivotal trials by comparing their predictive probability of success. The predictions are based on the available evidence from the previous trials, to which new hypotheses on the future development could be added. The resulting predictive probability of composite success provides a useful summary to support the discussions of the decision-makers. We present a fictive, but realistic, example in major depressive disorder inspired by a real decision-making case