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Working Paper
Optimal prediction under asymmetric loss
Prediction problems involving asymmetric loss functions arise routinely in many fields, yet the theory of optimal prediction under asymmetric loss is not well developed. We study the optimal prediction problem under general loss structures and characterize the optimal predictor. We compute it numerically in less tractable cases. A key theme is that the conditionally optimal forecast is biased under asymmetric loss and that the conditionally optimal amount of bias is time-varying in general and depends on higher-order conditional moments. Thus, for example, volatility dynamics (e.g., GARCH ...
Working Paper
On the network topology of variance decompositions: Measuring the connectedness of financial firms
The authors propose several connectedness measures built from pieces of variance decompositions, and they argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. The authors also show that variance decompositions define weighted, directed networks, so that their connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, the authors track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities ...
Working Paper
On the Wisdom of Crowds (of Economists)
We study the properties of macroeconomic survey forecast response averages as the number of survey respondents grows. Such averages are “portfolios” of forecasts. We characterize the speed and pattern of the gains from diversification as a function of portfolio size (the number of survey respondents) in both (1) the key real-world data-based environment of the U.S. Survey of Professional Forecasters, and (2) the theoretical model-based environment of equicorrelated forecast errors. We proceed by proposing and comparing various direct and model-based “crowd size signature plots,” which ...
Discussion Paper
Have postwar economic fluctuations been stabilized?
Previous investigations of whether the volatility of the U.S. economy diminished after World War II have been inconclusive because of questionable prewar macroeconomic aggregates. We examine, more broadly, the hypothesis of the stabilization of the postwar economy by focusing on the duration of business cycles, rather than their amplitude; in the process, we avoid the debate about the quality of prewar aggregates. Using distribution-free statistics, we find clear evidence of postwar duration stabilization in terms of a shift toward longer expansions and shorter contractions. Moreover, we find ...
Report
Modeling volatility dynamics
Many economic and financial time series have been found to exhibit dynamics in variance; that is, the second moment of the time series innovations varies over time. Many possible model specifications are available to capture this phenomena, but to date, the class of models most widely used are autoregressive conditional heteroskedasticity (ARCH) models. ARCH models provide parsimonious approximations to volatility dynamics and have found wide use in macroeconomics and finance. The family of ARCH models is the subject of this paper. In section II, we sketch the rudiments of a rather general ...
Working Paper
Cointegration and long-horizon forecasting
It is widely believed that imposing cointegration on a forecasting system, if cointegration is, in fact, present, will improve long-horizon forecasts. The authors show that, contrary to this belief, at long horizons nothing is lost by ignoring cointegration when the forecasts are evaluated using standard multivariate forecast accuracy measures. In fact, simple univariate Box-Jenkins forecasts are just as accurate. The authors' results highlight a potentially important deficiency of standard forecast accuracy measures--they fail to value the maintenance of cointegrating relationships among ...
Working Paper
On cointegration and exchange rate dynamics
Working Paper
Bounded rationality and strategic complementarity in a macroeconomic model: policy effects, persistence, and multipliers
Motivated by recent developments in the bounded rationality and strategic complementarity literatures, we examine an intentionally simple and stylized aggregative economic model when the assumptions of fully rational expectations and no strategic interactions are relaxed. We show that small deviations from rational expectations, taken alone, lead only to small deviations from classical policy-ineffectiveness, but that the situation can change dramatically when strategic complementarity is introduced. Strategic complementarity magnifies the effects of even small departures from rational ...