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Jaime Marquez
SAIS
Spring 2015
Spring 2015
1 / 35
Anatomy of an equation
Pretend that economic theory shows that imports today depend on todays
income and nothing else
mt = 0 + 1 yt + ut =
yt
0
1
+ ut = xt + ut
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Engle-Granger Cointegration
7:39:33 on 12022015
Coefficient
7.21714
1.52355
sigma
R^2
Adj.R^2
no. of observations
mean(m)
0.2884
0.956875
0.956355
85
5.57119
Std.Error
0.2996
0.03550
tvalue
24.1
42.9
m =
(SE)
F(2,81)
F(1,83)
Chi^2(2)
F(2,82)
F(2,82)
F(2,81)
=
=
=
=
=
=
P-value
345.95
246.74
26.120
86.436
86.436
461.84
[0.0000]**
[0.0000]**
[0.0000]**
[0.0000]**
[0.0000]**
[0.0000]**
7.2 + 1.5*y
(0.3) (0.036)
tvalue
24.1
42.9
Page: 1 of 2
RSS
6.90347459
F(1,83) =
1842 [0.000]**
loglikelihood
13.9082
no. of parameters
2
se(m)
1.38047
Instability tests:
variance
2.7717**
joint
8.0510**
Individual instability tests:
Constant
1.7011**
y
2.0427**
AR 12 test:
ARCH 11 test:
Normality test:
Hetero test:
HeteroX test:
RESET23 test:
tprob Part.R^2
0.0000
0.8748
0.0000
0.9569
tprob
0.0000
0.0000
7:45:23 on 12022015
Page: 2 of 2
Fprob
0.2316
0.4085
0.5337
0.2874
0.4093
0.5096
0.5909
0.5613
0.4294
0.5158
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1 = 2 =
+ n ubt
= n = 0
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Fitted
m = - 7.2 + 1.5*y
(SE) (0.3) (0.036)
6
5
4
3
1930
2
1940
1950
1960
1970
1980
1990
2000
2010
2000
2010
r:m (scaled)
AR 1-2 test:
-1
1930
1940
1950
1960
1970
1980
1990
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+ n 2t
The equation says that the variance today depends on the variance in the past
Glitch: we do not have data on 2ut
Then the test uses
u
bt2 = 0 + 1 u
bt2 1 +
1 = 2 =
+ n ubt2
= n = 0
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0.40
residsqrd
0.35
m = - 7.2 + 1.5*y
(SE) (0.3) (0.036)
0.30
0.25
0.20
0.15
0.10
0.05
1930
1940
1950
1960
1970
1980
1990
2000
2010
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Spring 2015
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Density
residuals
m = - 7.2 + 1.5*y
(SE) (0.3) (0.036)
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
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10 / 35
Parameter Constancy
Given
mt = 0 + 1 yt + ut =
yt
0
1
+ ut = xt + ut
Subsample
Dates
Estimate
Std. Error
1929-1939
1929-1940
1929-2013
1
2
75
b
1
b
2
b
stder(b
1 )
stder(b
2 )
b
stder( 75 )
75
0
Plot evolution of the 95% condence band of the b
i s for each subsample:
Jaime Marquez (SAIS)
b
i
2 stder (b
i ), i = 1, 2, ..., 75
Spring 2015
11 / 35
2.5
Constant
+/-2SE
0.0
-2.5
-5.0
-7.5
1940
1950
1960
1970
1980
1990
2000
2010
y +/-2SE
1.5
1.0
95% confidence band for slope
using data throug 1980
0.5
1940
1950
1960
1970
1980
1990
2000
2010
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Spring 2015
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Figure 1. Central tendencies and ranges of economic projections, 201417 and over the longer run
Percent
Actual
+
0
-
2009
2010
2011
2012
2013
2014
2015
2016
2017
Longer
run
Percent
Unemployment rate
10
9
8
7
6
5
2009
2010
2011
2012
2013
2014
2015
2016
2017
Longer
run
Percent
PCE inflation
2009
2010
2011
2012
2013
2014
2015
2016
2017
Longer
run
Note: Definitions of variables are in the general note to the projections table. The data for the actual values of
the variables are annual.
yt
0
1
+ ut = xt + ut
Estimate the parameters from 1929 to 1963 and predict y for all dates 1963
m
b t = xt b
, t = 1964...2013
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Forecast Error
The forecast error is
et = mt
m
b t = [ xt + u t ]
xt + u t
i h
xt b
=
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m
b t < +2Ft
m
bt
m
bt
<
>
2Ft
+2Ft
Spring 2015
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The expectation of mt
E (mt
m
b t is
6
7
m
b t ) = 4 xt + E ( u t ) 5
| {z }
=0
If E (b
) = , then
The variance of mt
var (mt
E (mt
m
b t is
m
bt)
m
b t ) = [ xt ]
= E [(mt
m
b t )]
xt E (b
)
[ xt ] = 0
= 2F = E [(mt
= E [(mt
m
bt)
E (mt m
b t ) ]2
{z
}
|
E (mt )) + (E (mt )
m
b t )]2
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= E [mt
= 2 + 2y
2 = E [yt
E (m
b t )]2 + E [E (m
bt)
m
b t )]2
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Condence Bands
Once we get the variance of the forecast error, F t , then the rule we follow is
The forecast is within the bounds of condence if
2F t < mt
which can re-written as
m
bt
m
b t < +2F t
2F t < mt < m
b t + 2F t
< m
b t 2F t
> m
b t + 2F t
Spring 2015
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Types of Forecasts
Spring 2015
21 / 35
Ex-post forecasts
Model
yt = + xt + yt 1 + u t
We have data for yt and xt for t = 1, ..., T from history
We want to assess how good the model predicts outside the estimation
sample
Estimate the parameters using N < T observations.
Generate forecasts from h = N + 1 to T
Set the disturbance to zero
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22 / 35
b yN + 1
ybN +2 = b
+b
xN + 2 +
N is
b yT 1
ybT = b
+b
xT +
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= [ + xN +h + yN +h
|
{z
y N +h
= [
|
b
] +
ybN +h
+ uN + h ]
}
h
b
xN +h +
{z
parameter uncertainty
i
b N +h 1
b
+b
xN +h + y
{z
}
|
b yN +h 1 +
ybN +h
uN + h
| {z }
model uncertainty
Spring 2015
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= + ( L ) yt
12
(L)
+ ut
Lj
j =0
(1 )
Spring 2015
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1-step Forecasts
West_Texas_Nominal
110
100
90
80
Model
Dependent variable: level of nominal West Texas oil price
Explanatory variables: constant + 12 lags of the dependent variable
70
60
2013
2014
2015
Spring 2015
26 / 35
b ybN +1
ybN +2 = b
+b
xN + 2 +
for h = 1, 2,
Jaime Marquez (SAIS)
(T
b ybN +h 1
ybN +h = b
+b
xN + h +
N)
Spring 2015
27 / 35
= yN +h
ybN +h
= [ + xN +h + yN +h
= [
h
b
] +
+ uN + h ]
xN + h + yN + h 1
b yN + h 1
b
+b
xN +h + b
b yN +h 1 + uN +h
b
b then
If we knew the true values of the parameters - = b
; = b
; =
eN + h
= (yN +h 1 ybN +h
= eN +h 1 + uN +h
1 ) + uN + h
Spring 2015
28 / 35
Same model for oil prices but now I use the models own predictions for
lagged values of the endogenous variable:
130
Foreca sts
W est_T e xas_Nom inal
120
110
100
90
80
70
60
2013
Model
Dependent variable: level of nominal West Texas oil price
Explanatory variables: constant + 12 lags of the dependent variable
2014
2015
(1 )
Spring 2015
29 / 35
Estimate parameters using data from 1929 to 1963 and generate 1-period
and s-periods ahead ex-post forecasts
Spring 2015
30 / 35
Coefficient
0.650539
1.06253
0.338683
sigma
R^2
Adj.R^2
no. of observations
mean(m)
0.100236
0.948394
0.945065
34
4.17776
Std.Error
0.1009
0.3226
0.08631
tvalue
6.45
3.29
3.92
tprob Part.R^2
0.0000
0.5728
0.0025
0.2592
0.0005
0.3319
RSS
0.311465034
F(2,31) =
284.9 [0.000]**
loglikelihood
31.5342
no. of parameters
3
se(m)
0.42766
Instability tests:
variance
0.34130
joint
1.4947*
Individual instability tests:
m_1
0.22652
Constant
0.18493
y
0.20693
1step (ex post) forecast analysis 1964 2013
Parameter constancy forecast tests:
Forecast Chi^2(50) =
671.86 [0.0000]**
Chow
F(50,31) = 0.50003 [0.9859]
CUSUM
t(49)
=
2.370 [0.0218]* (zero forecast innovation mean)
AR 12 test:
ARCH 11 test:
Normality test:
Hetero test:
HeteroX test:
RESET23 test:
m =
(SE)
F(2,29)
F(1,32)
Chi^2(2)
F(4,29)
F(5,28)
F(2,29)
=
2.7391 [0.0814]
= 0.049469 [0.8254]
=
3.5178 [0.1722]
=
1.4738 [0.2358]
=
1.4805 [0.2277]
=
7.1677 [0.0030]**
Residuals are OK
tvalue
3.44
8.14
tprob
0.0016
0.0000
Page: 1 of 1
Persistence
Parameter constancy
Persistence: Lagged dep. variable
m_1
+/-2SE
0.5
0.0
1940
2.5
1945
Constant
1950
1955
1960
1965
1950
1955
1960
1965
1950
1955
1960
1965
+/-2SE
0.0
-2.5
1940
1945
y +/-2SE
1.0
Income
0.5
1940
1945
Spring 2015
32 / 35
0.3
0.2
0.1
10
15
20
25
30
35
40
10
15
20
25
30
35
40
1.0
y(cum)
0.8
0.6
0.4
0
Spring 2015
33 / 35
1-step Forecasts
Coefficient Std.Error
m_1
0.650539 0.1009
Constant
-1.06253 0.3226
y
0.338683 0.08631
7.5
7.0
6.5
6.0
5.5
5.0
4.5
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Spring 2015
34 / 35
Forecasts
7.5
m_1
Constant
y
7.0
Coefficient Std.Error
0.650539
0.1009
-1.06253
0.3226
0.338683 0.08631
6.5
6.0
5.5
5.0
AR 1-2 test:
F(2,29) = 2.7391 [0.0814]
ARCH 1-1 test: F(1,32) = 0.049469 [0.8254]
Normality test: Chi^2(2) = 3.5178 [0.1722]
4.5
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Spring 2015
35 / 35