Tuesday, July 26, 2016

The Forecasting Performance of Models for Cointegrated Data

Here's an interesting practical question that arises when you're considering different forms of econometric models for forecasting time-series data:
"Which type of model will perform best when the data are non-stationary, and perhaps cointegrated?"
To answer this question we have to think about the alternative models that are available to us; and we also have to decide on what we mean by 'best'. In other words, we have to agree on some sort of loss function or performance criterion for measuring forecast quality.

Notice that the question I've posed above allows for the possibility that the data that we're using are integrated, and the various series we're working with may or may not be cointegrated. This scenario covers a wide range of commonly encountered situations in econometrics.

In an earlier post I discussed some of the basic "mechanics" of forecasting from an Error Correction Model. This type of model is used in the case where our data are non-stationary and cointegrated, and we want to focus on the short-run dynamics of the relationship that we're modelling. However, in that post I deliberately didn't take up the issue of whether or not such a model will out-perform other competing models when it comes to forecasting.

Let's look at that issue here.

Tuesday, July 5, 2016

Recommended Reading for July

Now that the Canada Day and Independence Day celebrations are behind (some of) us, it's time for some serious reading at the cottage. Here are some suggestions for you:

© 2016, David E. Giles

Saturday, June 25, 2016

Choosing Between the Logit and Probit Models

I've had quite a bit say about Logit and Probit models, and the Linear Probability Model (LPM), in various posts in recent years. (For instance, see here.) I'm not going to bore you by going over old ground again.

However, an important question came up recently in the comments section of one of those posts. Essentially, the question was, "How can I choose between the Logit and Probit models in practice?"

I responded to that question by referring to a study by Chen and Tsurumi (2010), and I think it's worth elaborating on that response here, rather than leaving the answer buried in the comments of an old post.

So, let's take a look.

Tuesday, June 7, 2016

The ANU Tapes of the British (Econometrics) Invasion

As far as I know, the Beatles never performed at the Australian National University (the ANU). But the "fab. three" certainly did, and we're incredibly lucky to have the visual recordings to prove it!

Stan Hurn (Chair of the Board of the National Centre for Econometric Research, based in the Business School at the Queensland University of Technology) contacted me recently about a fantastic archive that has been made available.

The Historical Archive at the NCER now includes the digitized versions of the movies that were made in the 1970's and 1980's when various econometricians from the London School of Economics visited and lectured at the ANU. Specifically, eight lectures by Grayham Mizon, five by Ken Wallis, and a further eight lectures by Denis Sargan can be viewed here.

I was on faculty at Monash University at the time of these visits (and that of David Hendry - so I guess the fab. four of of the LSE did actually make it). I recall them well because the visitors also gave seminars in our department while they were in Australia. 

Before you view the lectures - and I really urge you to do so - it's essential that you read the background piece, "The ANU Tapes: A Slice of History", written by Chris Skeels. (Be sure to follow the "Read more" link, and read the whole piece.) As it happens, Chris was a grad. student in our group at Monash back in the day, and his backgrounder outlines a remarkable story of how the tapes were saved.

Kudos to Stan and his colleagues for putting this archive together. And double kudos to Chris Skeels for having the foresight, energy, and determination to ensure that we're all able to share these remarkable lectures.

Thank you both!

© 2016, David E. Giles

Thursday, June 2, 2016

Econometrics Reading List for June

Here's some suggested reading for the coming month:

© 2016, David E. Giles

Saturday, May 28, 2016

Forecasting From an Error Correction Model

Recently, a reader asked about generating forecasts from an estimated Error Correction Model (ECM). Really, the issues that arise are no different from those associated with any dynamic regression model. I talked about the latter in a previous post in 2013.

Anyway, let's take a look at the specifics.........

Sunday, May 22, 2016

A Quick Illustration of Pre-Testing Bias

The statistical and econometric literature on the properties of "preliminary-test" (or "pre-test") estimation strategies is large and well established. These strategies arise when we proceed in a sequential manner when drawing inferences about parameters. 

A simple example would be where we fit a regression model; test if a regressor is significant or not; and then either retain the model, or else remove the (insignificant) regressor and re-estimate the (simplified) model.

The theoretical literature associated with pre-testing is pretty complex. However, some of the basic messages arising from that literature can be illustrated quite simply. Let's look at the effect of "pre-testing" on the bias of the OLS regression estimator.

Monday, May 16, 2016

Graduate Econometrics Exam

Occasionally readers ask about the exams that I set in my graduate econometrics courses.

The elective graduate econometrics course that I taught this past semester was one titled "Themes in Econometrics". The topics that are covered vary from year to year. However, as the title suggests, the course focuses on broad themes that arise in econometrics. Examples might include maximum likelihood estimation and the associated testing strategies;instrumental variables/GMM estimation; simulation methods; nonparametric inference; and Bayesian inference.

This year most of the course was devoted to maximum likelihood, and Bayesian methods in econometrics.

The mid-term test covered the first of these two thematic topics, while the final exam was devoted largely to Bayesian inference.

You can find the mid-term test here. The final exam question paper is here; and the associated R code is here.

© 2016, David E. Giles

Sunday, May 8, 2016

Econometric Computing in the Good Ol' Days

I received an email from Michael Belongia, who said:

"I wrote earlier in response to your post about Almon lags but forgot to include an anecdote that may be of interest to your follow-up.
In the late 1960s, the "St. Louis Equation"  became a standard framework for evaluating the relative effects of monetary and fiscal policy. The equation was estimated by the use of Almon lags (see, e.g., footnotes 12 and 18 in the article).  To estimate the equation, however, the St. Louis Fed had to use the computing power of nearby McDonnell-Douglas!!!  As Keith Carlson, who was in the Bank's Research Dept at the time, confirmed for me:   
'We did send our stuff out to McDonnell-Douglas.  Gave the instructions to the page who took it to the Cotton Belt building at 4th and Pine and the output would be picked up a couple days later. We did this until about 67 or 68 when we shifted to in-house.  In fact we hired the programmer from M-D.'
Difficulties like this certainly made economists of the era think more carefully about their models before taking them to the data."
I concur wholeheartedly with Michael's last comment. My own computing experience began in the late 1960's - I've posted about this in the past in The Monkey Run.

And I haven't forgotten the follow-up post on Almon distributed lag models that I promised!

© 2016, David E. Giles