Catching a floating treasure
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1 Catching a floating treasure A genuine ex-ante forecasting experiment in real time Christian Müller 1 and Eva Köberl 2 1 German University in Cairo Egypt 2 ex-eth Zurich Berlin, 18 June 2014
2 Objective The test of all knowledge is experiment. Richard P. Feynman Physicist, Nobel Laureate Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
3 Objective Test forecasting method with survey data under realistic conditions. Special features: surprise indicator methodology genuine ex-ante forecasting in real time Research question: Can we derive an efficient, fast and reliable forecasting tool for Swiss GDP growth? Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
4 Motivation Research gaps experimental economics + time series economics genuine ex-ante forecasting: theorists vs. practitioners added value of surprise indicator forecasting of moving targets Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
5 Some literature Real time analyses Orphanides&van Norden (2005): misleading policy conclusions Diebold&Rudebusch (1991): leading indicators maybe misleading Graff&Sturm (2010), Siliverstovs (2011): modelling of data revisions Survey data Zarnowitz (1973), Öller (1990), Balke & Petersen (2002)... : BTS data helpful Müller&Köberl (2007): surprise approach even more helpful?! Experimental economics and forecasting Woodard & Federowsky (2011), Sornette: public forecast announcements of financial data Gunnar Bårdsen: Swedish GDP forecasts online Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
6 Outline 1 Motivation 2 The experiment Basic features The hypotheses Implementation Experiment evaluation 3 An almost infeasible horse race Relevance of survey data Relative forecasting performance 4 Summary Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
7 Genuine vs. usual ex-ante forecasting Common confounding factors in forecasting experiments ex-ante model choice selection of exogenous variables availability of vintage data for l.h.s. and r.h.s. variable(s) undocumented expert interventions the state of the art in econometrics hindsight Ex-ante commitment is key! Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
8 Special feature I: The commitment The commitment forecasts posted on the web ing Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
9 Hypotheses 1/2 Hypothesis 1: A simple, parsimonious, linear time series model delivers forecasts which are more timely than official data as good as official data on average as good as official data in terms of forecast error variance serious competitors to latest rivals. Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
10 Hypotheses 1/2 illustration: the time line Figure: Data release and nowcasting process Q 1 Jan Feb CE 1 SECO 1 Q 2 Mar Apr May CE: forecasting (nowcasting) with surprise indicator SECO: SECO s forecasts (first releases) Begin of experiment: 2007 q3 1st intermediate results: 2011 q3 2nd intermediate results: 2014 q2 CE 2 SECO 2 June Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
11 Hypotheses 2/2 Hypothesis 2: The surprise indicator provides reliable and robust information. economic sophistication v. brute force Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
12 Special feature I: Surprise indicator Why survey data? timely available (almost) not subject to revisions Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
13 Digression: The surprise indicator Capacity utilisation: Combining level judgement and quantitative changes Currently, are your technical capacities too high? just right? too low? Plus: Percentage change in capacity utilisation Result: Semantic assessment of firms position! too high? AND decrease negative shock too high/low? AND inc./dec. adjustment to normal too low AND increase positive shock Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
14 Digression: The surprise indicator Empirical characteristics of surprises change in capacity utilisation (%) = + judgment (level) = Percentage shares, N = 92706, period: , quarterly frequency Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
15 Digression: The surprise indicator Figure: The surprise indicator 100% 90% 80% 70% yty GDP 60% 50% % % 20% 10% 0% -3 mp me mm ep ee em pp pe pm C:\ZHAW\Projekte\Quantifizierung\CMEK\Markov\Grafiken.odg Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
16 Model selection The general model which is going to be reduced to a special model by PcGets: 4 4 Y t = D + A i Y t i + B i X t 1 + U t (1) i=1 i=0 where Y t = D = [ yt ] [ emt, X t = pm t 4 y t [ c s1 s 2 s ], A i = ] [ ut, U t = 0 [ ai, ] and ] [ bi,1 b, B i = i,2 0 0 ]. em t and pm t represent the shares of qualitatively different negative surprises. y t: SECO s latest release Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
17 Experiment evaluation plan Note: SECO data subject to (several) revisions Forecast evaluation vs. final data comparison to SECO s genuine ex-ante approach Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
18 The floating problem Ex-ante and ex-post information Figure: Ex-ante, ex-post information and nowcasts Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
19 Data vintages Empirical basis Figure: Finalised (green shaded) and reasonably finalised (grey shaded) data vintages Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
20 Data vintages Empirical basis Figure: Data vintages and data revisions Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
21 Vintage characteristics Observations No finalised data for entire sample Revisions after more than seven years No finalised data for experiment period available! 1st intermediate results: Reasonably finalised data: q3 (N = 11) 2nd intermediate results: Reasonably finalised data: 2007q3 2010q1 (N = 11) 2nd intermediate results: moving target data: 2007q3 2012q1 (N = 19) Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
22 Characteristics of revisions I Figure: Mean revision: Cumulated sum of average revisions 3.2% ( ) Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
23 Characteristics of revisions II Figure: Standard deviation of revisions Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
24 Characteristics of revisions Figure: Mean, minimum and maximum of SECO revisions (final data: 2010q1) Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
25 The floating problem Ex-ante and ex-post information Figure: Seco data releases, nowcasts and narrow forecasting window Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
26 The floating problem Ex-ante and ex-post information Figure: Seco data releases, nowcasts and wide forecasting window Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
27 Competing model Genuine ex-ante forecasts SECO first releases v. GDP nowcast (surprise indicator) Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
28 Forecasting performance Forecast evaluations model MFE MAFE RMSFE 2007q3 through 2010q1 (N = 11 one-step forecasts) SECO first GDP nowcast q3 through 2012q1 (N = 19 one-step forecasts) SECO first GDP nowcast Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
29 Forecasting evaluation Forecast evaluation for N = 11 one-step forecasts: Test statistics Test statistics model sign change D-M MAFE D-M RMSFE GDP nowcast 3 (.344) SECO first 4 (.753) n.a..05 (.48) Diebold-Mariano modified test statistics (p-values for two-sided test) n.a..23 (.59) Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
30 Forecast evaluation summary Evaluation summary 1 indicator forecast errors with lowest variance 2 SECO forecasts not significantly better CAVEAT: Benchmark still going to be revised. Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
31 Summary Experiment largely successful Evidence for surprise indicator s informational advantage Forecasting model delivers timely accurate efficient GDP nowcasts. Further research Develop economy-wide, sector-specific, regional surprise indicators Investigate role of y t (SECO s first release) Employ more sophisticated (but simple) models in genuine ex-ante experiment Note: Continuous evaluation of ongoing experiment required. Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
32 Catching a floating treasure Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
33 The double floating problem Ex-ante and ex-post information Figure: Swiss GDP growth (y-o-y) at the beginning and at the end of the experiment Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
34 The floating problem Ex-ante and ex-post information Figure: Ex-ante, ex-post information and nowcasts Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
35 Characteristics of revisions Figure: Mean, minimum and maximum of SECO revisions (final data) Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
36 Characteristics of revisions Figure: Mean, minimum and maximum of SECO revisions (final data: 2010q1) Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
37 Characteristics of revisions I Figure: Mean revision: Cumulated sum of average revisions 3.2% ( ) Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
38 Characteristics of revisions II Figure: Standard deviation of revisions Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
39 Data vintages Empirical basis Figure: Finalised (green shaded) and reasonably finalised (grey shaded) data vintages Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
40 Data vintages Empirical basis Figure: Data vintages and data revisions Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
41 The floating problem Ex-ante and ex-post information Figure: Seco data releases, nowcasts and narrow forecasting window Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
42 The floating problem Ex-ante and ex-post information Figure: Seco data releases, nowcasts and wide forecasting window Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
43 The moving target Figure: Final, reasonably final, provisional GDP data and surprise indicator nowcasts Müller, Köberl (GUC & ETHZ) Genuine ex-ante forecasting experiment Berlin, 18 June / 46
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