Thursday, June 24, 2021

CIRET for Survey Expectations Research

I recently had the occasion to learn more about CIRET (Centre for International Research on Economic Tendency Surveys), a forum for economists and institutions concerned with survey expectations in business cycle analysis and prediction.  If you're interested in survey expectations but not familiar with CIRET, check them out here.  They are an interesting and highly-focused group.   

Saturday, June 19, 2021

Machine Learning and Financial Crises Redux

I earlier blogged on Helene Rey et al., "Answering the Queen: Machine Learning and Financial Crises."  It's been around for a while, and I've had the pleasure of discussing it twice at BIS and NBER conferences.  It keeps getting better, and the latest draft (I think) is here.  Very cute that they thanked me as "Franck" -- reminds me of the "wedding planner" in Steve Martin's Father of the Bride. I'm looking forward to learning the very latest, this coming Friday 25 June, at the AMLEDS seminar.  Please check it out.

Thursday, April 29, 2021

The Pandemic Recession Ended Long Ago

Speaking of today's strong U.S. GDP release:

Question:  When the smoke clears and the Pandemic Recession ends, how will it stack up relative to its ancestors? 

Answer:  The smoke has already cleared -- the recession ended long ago -- and it was likely both the deepest and the shortest of all time.  

The NBER  chronology does not measure recession deepness, but ADS does, and it reveals that the Pandemic Recession is clearly the deepest U.S. recession since 1960 (and probably of all time, although ADS is calculated only from 1960).  The NBER chronology does measure recession duration, but the NBER has not yet announced the Pandemic Recession's ending date, so we don't know its ``official" duration.  But ADS is released in much more timely fashion than the NBER chronology, and ADS has long indicated a clear return to sustained positive growth by mid-May 2020 (as have other leading nowcasts, like the CFNAI).  This would make the Pandemic Recession not only the deepest recession at least since 1960, but also the all-time shortest, by a wide margin (presently the shortest is the six-month recession of early 1980).  In my view, any eventual claim that the recession ended later than May 2020 would be more an indication of reluctance to declare such a short recession than an unbiased assessment of economic reality.

Tuesday, April 27, 2021

Variational Bayes for Network Estimation

Check out the fine paper, "Fast and Accurate Variational Inference for Large Bayesian VARs with Stochastic Volatility," by Chan and Yu (2020), which builds on earlier work by Koop and Korobilis (2018) and Gefang, Koop, and Poon (2019) and much earlier work. By using a global approximating density, the variational approach abandons the naive hope of achieving perfection in the limit of an MCMC sequence, in exchange for massive speed gains even in very high dimensions (without sacrificing much accuracy when done well). 

Superficially Chan-Yu looks like just another "Bayesian VARs with stochastic volatility" paper (not that there's anything wrong with that!).  But here's a key thought chain: 

(1) Networks are productively characterized and understood by interpreting them as VARS and then using standard VAR estimation, decomposition, and visualization technology (see Diebold-Yilmaz et al., here and here and the references therein).  

(2) But many interesting networks are very high-dimensional, which presented a problem for taking network-VAR analysis to the next level, where, for example, one might want a 5000-dimensional network VAR.

(3) But ultra-high-dimensional situations are now much less problematic, thanks to variational Bayes.  Moving in that direction, Chan and Lu do variational Bayes for the DDLY bank network (approximately 100 dimensions), and moreover they incorporate stochastic volatility.

Friday, April 23, 2021

Apr. 30: Bridging Factor and Sparse Models

I blogged before on the Fan-Masini-Medeiros "Bridging Factor and Sparse Models" paper, here.  Now we can see it presented live on April 30 (16:00 Amsterdam time), together with the equally fascinating Pettenuzzo-Sabbatucci-Timmermann paper on firm behavior during the pandemic (15:00).  See you there!

You will have to register for the webinars in advance, at:

On behalf of the organisers Bart Keijsers and Sander Barendse:

We are happy to invite you to the UvA Financial Econometrics Workshop, which consists of two presentations around the topic of financial econometrics. It will be held online on

Friday 30 April, from 15:00 to 17:00.

Below is the list of the speakers, the schedule, and link to register for the workshop. The information is also available on the website:

List of speakers

  • Riccardo Sabbatucci (Stockholm School of Economics)
    Title: Dividend Suspensions and Cash Flows During the COVID-19 Pandemic: A Dynamic Econometric Model


Firms suspended dividend payments in unprecedented numbers and at unparalleled speed in response to the outbreak of the COVID-19 pandemic. We develop a dynamic econometric model that allows dividend suspensions to affect the conditional mean, volatility, and jump probability of growth in daily dividends and demonstrate how the parameters of this model can be estimated using Bayesian Gibbs sampling methods. We find that dividend suspensions had a sharp and immediate impact on the conditional mean and volatility of daily dividend growth. Information embedded in daily dividend suspensions proves valuable in monitoring and predicting the trajectory of broader measures of economic activity during the pandemic.

Coauthors: Davide Pettenuzzo (Brandeis) and Allan Timmermann (UCSD)

Personal website | SSRN link

 Marcelo Medeiros (Pontifical Catholic University of Rio de Janeiro)

  • Title: Bridging factor and sparse models
    Factor and sparse models are two widely used methods to impose a low-dimensional structure in high-dimension. They are seemingly mutually exclusive. In this paper, we propose a simple lifting method that combines the merits of these two models in a supervised learning methodology that allows to efficiently explore all the information in high-dimensional datasets. The method is based on a flexible model for panel data, called factor-augmented regression model with both observable, latent common factors, as well as idiosyncratic components as high-dimensional covariate variables. This model not only includes both factor regression and sparse regression as specific models but also significantly weakens the cross-sectional dependence and hence facilitates model selection and interpretability. The methodology consists of three steps. At each step, the remaining cross-section dependence can be inferred by a novel test for covariance structure in high-dimensions. We developed asymptotic theory for the factor-augmented sparse regression model and demonstrated the validity of the multiplier bootstrap for testing high-dimensional covariance structure. This is further extended to testing high-dimensional partial covariance structures. The theory and methods are further supported by an extensive simulation study and applications to the construction of a partial covariance network of the financial returns and a prediction exercise for a large panel of macroeconomic time series from FRED-MD database.

Coauthors: Jianqing Fan (Princeton) and Ricardo Masini (Princeton)

Personal website | SSRN link


15:00 - 16:00 Webinar Riccardo Sabbatucci (45 min talk + 15 min questions)

16:00 - 17:00 Webinar Marcelo Medeiros (45 min talk + 15 min questions)


You will have to register for the webinars in advance, via the following link:

Feel free to share this with your colleagues, and please let us know if you have any questions.

Kind regards,

Bart Keijsers ( and Sander Barendse (


---------------------------------------------------------------------------------- Netherlands Econometrics Study Group: NESG List: View, Join or Leave using

Wednesday, April 14, 2021

To my loyal email subscribers

Hi Email Subscribers,

Thanks so much for your No Hesitations support, and email subscriptions, over the years.  The message below just arrived.  Not sure what I'll be able to do -- we will see.  In any event your email subscription may be temporarily or even permanently interrupted or cancelled.  You can of course always view the blog directly at, or follow my Twitter posts (@FrancisDiebold) which link to the blog posts. I hope you will!


Hi Francis,
FeedBurner has been a part of Google for almost 14 years, and we're making several upcoming changes to support the product's next chapter. Here’s what you can expect to change and what you can do now to ensure you’re prepared.
Starting in July, we are transitioning FeedBurner onto a more stable, modern infrastructure. This will keep the product up and running for all users, but it also means that we will be turning down most non-core feed management features, including email subscriptions, at that time.
For those who use FeedBurner email subscriptions, we recommend downloading your email subscribers so that you can migrate to a new email subscription service.
For many users, no action is required. All existing feeds will continue to serve uninterrupted, and you can continue to create new accounts and burn new feeds. Core feed management functionality will continue to be supported, such as the ability to change the URL, source feed, title, and podcast metadata of your feed, along with basic analytics.
Learn More

Tuesday, April 13, 2021

Practical Guide to Climate Econometrics

This tutorial site is very nice for  climate data sources, computing environments for climate data manipulation, special climate data issues, etc., even if it's shallow on actual modeling.  Good for students. Hats off to the lead  authors, two of whom are indeed Ph.D. Students: Azhar HussainJames RisingKevin Schwarzwald, and Ana Trisovic.  Thanks to Glenn Rudebusch for alerting me to the site.  

Wednesday, April 7, 2021

Economic Forecasting Mini-Course


DEADLINE: Friday 7 May 2021
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View it in your browser.
Euro Area Business Cycle Network Training School


 Recent Developments in Forecasting


Graham Elliott (UC San Diego)
Allan Timmermann (UC San Diego)

Hosted online with Banca d’Italia, Italy

 1-8 June 2021


Deadline: 6pm (UK time), Friday 7 May 2021

General Description

We are pleased to announce details of the latest EABCN Training School; a three-day course entitled “Recent Developments in Forecasting”. Professors Graham Elliott and Allan Timmermann will teach the course. It is primarily aimed at participants in the Euro Area Business Cycle Network but applications will also be considered from doctoral students, post-doctoral researchers and economists working in central banks and government institutions outside of the network, as well as commercial organisations (fees applicable for non-network organisations).
Course Outline

The course introduces participants to a variety of advanced topics and recent developments in economic forecasting. The first part of the course examines the forecasting problem in general, showing that point forecasting is parameter estimation with a conditional model of the outcome and density forecasting is estimation of a conditional density. We clarify what we mean by optimal forecasting and relate classical and Bayesian approaches.
Understanding these issues provides a foundation for all forecasting problems. Binary forecasting or classification is most closely related to decision making. The simplicity of the loss function allows many strong results. Parametric, Semiparametric and nonparametric methods will be discussed and properties of the approaches examined.
Often the difference between good and bad forecasting approaches hinges on how they deal with changes to the underlying data generating process. The course therefore next addresses the consequences of model instability on forecasting performance and discusses strategies for dealing with such instability, using empirical illustrations from macroeconomics and finance. We also discuss how one can use multivariate (panel) information to better deal with model instability in a forecasting context.
A major issue in modern forecasting is the large number of potential predictors. Much work has been undertaken in econometrics, statistics and computer science in recent years. We provide a framework for thinking about methods as well as explain how some of the popular machine learning methods work and their properties. With this in place, we cover a variety of variable selection and model aggregation methods.

The final part of the course covers how to choose among competing forecasts and formally compare forecasting performance across two or possibly large numbers of forecasts. Ignoring the search across multiple models for a good forecasting model can introduce data mining biases, and we discuss ways to handle this problem.
The course draws on material from the following book (referred to as ET):
G. Elliott and A. Timmermann, 2016, Economic Forecasting. Princeton University Press.

Part I: Foundations and the Binary Forecasting Problem

  1. The Forecasting Problem
    1. Economic loss functions and ‘optimal’ forecasting  (ET chapter 2-3)
    2. Classical and Bayesian Forecasts (ET chapter 4-5)
  2. The Binary Forecasting Problem (ET chapter 12)
    1. Loss functions
    2. Point and Density Forecasting
    3. Methods for Classification/Binary Forecasting
Part II: Predictive Modelling Methods and Model Instability
  1. Forecasting under model instability
    1. Detection of breaks in time-series forecasting models (Rossi, 2013, Elliott and Mueller, 2006)
    2. Choice of estimation window in the presence of instability (Pesaran and Timmermann, 2007)
    3. Ad-hoc Strategies vs. Parametric Models of the Change Process (ET chapter 19, Pettenuzzo and Timmermann, 2011, 2017)
    4. Exploring Panel Data for Detecting and Forecasting under Breaks (Smith and Timmermann, 2017)
  2. Forecasting with Many Regressors
    1. Sparse vs. Dense Models: PCA, PLS, LASSO and variants
    2. Machine Learning Methods: Trees and neural nets (Gu, Kelly, and Xia, 2020, Coulombe et al, 2020)
  3. Model Selection and Forecast Combination Methods
    1. Model Selection Methods (ET, chapter 6)
    2. Model Aggregation approaches (Elliott, Gargano, and Timmerman, 2013).
Part III: Evaluating and Comparing Forecasting Performance
  1. Comparing forecasting performance: Horse races and p-hacking
    1. Comparisons of forecast performance.  (ET chapter 17, Clark and McCracken 2001, Diebold and Mariano 1995, Giacomini and White, 2006)
    2. Evaluating and comparing many forecasting models (White, 2000, Sullivan, Timmermann and White, 1999, Romano and Wolf, 2005, Hansen, Lunde, and Nason, 2011)
    3. Data mining and p-hacking (Harvey, Liu, and Zhu, 2016)
    4. Comparing forecasting performance in a single cross-section (Qu, Timmermann and Zhu, 2020)

Administrative information:

The course will take place online, in the evenings for Europe, from 5pm CEST:

  • June 1st lecture (3 hours)
  • June 3rd lecture (3 hours)
  • June 4th practice (1.5 hours)
  • June 7th lecture (3 hours)
  • June 8th practice (3 hours).

Candidates who have a CEPR profile should apply by submitting their CV online at by 6pm (UK time), 7 May, 2021. If you do not currently have a CEPR profile, please create a new one here and then click on the registration link.
PhD students should also send a statement that specifies the ways participating in the school will be useful for their current research (max 300 words).
Participants from non-academic institutions where the employer is not a member of the EABCN network are charged a course fee of €1000.
About the Instructors:
Graham Elliott is a professor of economics. He works in the field of econometrics, developing statistical methods for economic and other applications. He is a fellow of the Center for Applied Macroeconomic Analysis (CAMA), author of the reference/text "Economic Forecasting" jointly with Allan Timmermann, former co-editor of the International Journal of Forecasting (IJF) and co-editor of Volumes 1 and 2 of the Handbook of Forecasting.
Allan Timmermann holds a Atkinson/Epstein Chair in Management Leadership at the Rady School of Management and is also a professor in economics at UC San Diego's department of economics since 1994. He obtained his PhD from University of Cambridge after initial economics training at the University of Copenhagen. Timmermann is a very productive scholar in finance and applied econometrics. He serves as an associate editor on leading journals in finance, economics and forecasting including Journal of Business and Economic Statistics, Journal of Economic Dynamics and Control, Journal of Financial Econometrics, and Journal of Forecasting. He has published in journals such as Journal of American Statistical Association, Review of Economic Studies, Journal of Finance, and Journal of Econometrics.

For more information on EABCN, visit the website.

Monday, April 5, 2021

Local Projections vs. VARs

Interesting paper, showing an interesting LP (higher variance) vs. VAR (higher bias) tradeoff.

The authors conclude that "Unless researchers are overwhelmingly concerned with bias, shrinkage via Bayesian VARs or penalized LPs is attractive."  

A key point in terms of whether researchers are "overwhelmingly concerned with bias" is that it's not so much about researchers' preferences (innate feelings about bias) as it is about the data -- dynamic environments with large moving-average roots force concern with bias, because that's where low-ordered VARs are poor approximations, injecting large amounts of bias.

So: Much depends on how important large moving-average roots are in macroeconomic dynamics.  In principle they can be be very important (so un-penalized LP may be attractive).  In practice, well, usually it seems not so much (in which case penalized LP may be attractive).

Local Projections vs. VARs: Lessons From Thousands of DGPs

By:Dake LiMikkel Plagborg-M{\o}llerChristian K. Wolf
Abstract:We conduct a simulation study of Local Projection (LP) and Vector Autoregression (VAR) estimators of structural impulse responses across thousands of data generating processes (DGPs), designed to mimic the properties of the universe of U.S. macroeconomic data. Our analysis considers various structural identification schemes and several variants of LP and VAR estimators, and we pay particular attention to the role of the researcher's loss function. A clear bias-variance trade-off emerges: Because our DGPs are not exactly finite-order VAR models, LPs have lower bias than VAR estimators; however, the variance of LPs is substantially higher than that of VARs at intermediate or long horizons. Unless researchers are overwhelmingly concerned with bias, shrinkage via Bayesian VARs or penalized LPs is attractive.

Sunday, March 28, 2021

COVID Modeling Update: Bayesian Analysis

I often shy away from papers by colleagues/coauthors, trying to maintain some semblance of objectivity.  But this one is too cool to let go, "Bayesian Estimation of Epidemiological Models: Methods, Causality, and Policy Trade-Offs," by Arias, Fernandez-Villaverde, Rubio-Ramırez, and Shin.  Non-linear non-Gaussian state space with time-varying parameters are central. See  

Sunday, March 21, 2021

The Latest in Probability Forecast Evaluation

VERY nice and useful paper in the Proceedings of the National Academy by Tilmann Gneiting et al.: "Stable reliability diagrams for probabilistic classifiers",  Supplement:

(Significantly-revised version of "Evaluating probabilistic classifiers: Reliability diagrams and score decompositions revisited“,

Thursday, March 18, 2021

Machine Learning Panel Data

This looks very cool.  Great presenter and great discussant.  March 22.

 SoFiE Seminar

with Eric Ghysels and Max Farrell


Eric Ghysels (UNC Chapel Hill)


“Machine Learning Panel Data Regressions with an Application to Nowcasting Price Earnings Ratios"


Max Farrell (University of Chicago)


March 22, 2021


11am New York / 8am San Diego / 3pm London / 4pm Paris / 11pm Beijing

Zoom Link:


A link to a video recording will be available here soon after the event.

Sunday, March 14, 2021

The Finance Crowd Analysis Project

I have long been interested in crowdsourcing, from a forecast combination perspective. Fincap, described below, is related but different.  I look forward to seeing and pondering the fincap results.

The following material is adapted from the Fincap project site.  For details, including a really slick 2-minute video intro, see

#fincap is the first crowd-sourced empirical paper in Economics/Finance.

More than 100 research teams (RTs) from around the world will test the same set of hypotheses on the same data. They will work independently and write a short academic paper based on their findings.

These reports will be evaluated by more than 30 distinguished academics whom we refer to as peer evaluators (PEs). Their feedback will be passed on to the RTs so that they can revise their papers. 

The project coordinators will study the #fincap results to learn about the scientific process. They have committed ex-ante to a meta-science analysis which was frozen before any instructions and data were given to the RTs and PEs.

Sunday, March 7, 2021

Network Cluster-Robust Inference

Interesting progression of HAC / cluster-robust inference, from serial correlation, to spatial correlation (e.g., Müller and Watson, 2021, here), and now network-induced correlation. 

Very cool new network result from Michael Leung at USC: Asymptotic independence (in the number of linking steps), the key to robust/clustered inference in network environments, holds iff network clusters have conductance (the ratio of edge boundary size to volume) approaching 0. (Yes, necessary and sufficient!)

Friday, March 5, 2021

2021 SoFiE Machine Learning in Finance and Economics Conference TODAY

Starts in a few hours!  Program looks great. Hard to script a better day.    

Registration and program at :

2021 SoFiE Machine Learning Virtual Conference 

Eric Ghysels, UNC Chapel Hill 
Bryan Kelly, Yale University
Dacheng Xiu, University of Chicago

March 5, 2021 

10:00 AM: Introduction 

Session 1: Chair Eric Ghysels 

10:10 – 10:55 Mispricing and uncertainty in international markets, Mirela Sandulescu and Paul Schneider 

Discussant: Rohit Allena 

11:00 – 11:45 A penalized two-pass regression to predict stock returns with time-varying risk premia, Gaetan Bakalli, Stephane Guerrier and Olivier Scaillet 

Discussant: Paolo Zaffaroni 

Session 2: Chair Bryan Kelly 

1:00 – 1:45 The Knowledge Graph for Macroeconomic Analysis with Alternative Big Data, Yucheng Yang, Yue Pang, Guanhua Huang and Weinan E 

Discussant: Phillipe Goulet Coulombe 

1:50 – 2:35 On the Aggregation of Probability Assessments: Regularized Mixtures of Predictive Densities for Eurozone Inflation and Real Interest Rates, Francis X. Diebold, Minchul Shin, Boyuan Zhang

Discussant: Allan Timmermann 

Session 3: Chair Dacheng Xiu 

2:45 – 3:30 High-Frequency Expectations from Asset Prices: A Machine Learning Approach, Aditya Chaudhry and Sangmin S. Oh 

Discussant: Jonathan Wright 

3:35 – 4:20 High-Dimensional Granger Causality Tests with an Application to VIX and News, Andrii Babii, Eric Ghysels and Jonas Striaukas 

Discussant: Markus Pelger 

4:20 – 4:30 Conclusion 

Sunday, February 28, 2021

Improved Measurement of Real GDP

Tincho Almuzara, Gabriele Fiorentini, and Enrique Sentana have a fascinating new paper, "Aggregate Output Measurements: A Common Trend Approach,"

Totally reasonable to explore the cointegration route, and quite striking how much it reduces the extraction error variance for long-run objects.  At the same time, it’s remarkable how little difference it makes for short-run objects when the signal-to-noise ratio is high.

That is, the extractions in the left and right panels of their Fig 5 appear almost identical.  I would like to see a plot of their divergence (surely close to 0, although it would be interesting to see if/when the divergence is large -- e.g., are there business cycle effects?), along with a confidence interval (surely it would include 0?).  

Monday, February 22, 2021

Bridging Sparse Models and Factor Models

Check out the new "Bridging Factor and Sparse Models," by Fan, Masini, and Medeiros.  So many interesting connections to think about. 

A key distinction is hard constraints vs. soft constraints.  Both sparsity and factor structure (reduced rank) are examples of hard constraints, and in that sense they are more similar than different. Consider an  NxN parameter matrix M with elements a, b, ... Sparsity is the hard constraint M (or some subset of M) = 0, e.g., a = b = 0.  But one can of course consider more general hard constraints.  An obvious class is of the form  f(M) = 0, e.g., a + b^2 = 3.  Another obvious class, in multivariate environments, is reduced-rank (rank(M) < N) -- that is, factor structure.    

Wednesday, February 17, 2021

11th ECB Forecasting Conference

 Always a great conference!

11th ECB Conference on Forecasting Techniques — Macroeconomic forecasting in abnormal times,

will take place as an online event at the ECB on 15 and 16 June 2021.

Joshua Chan (Purdue University) and Christopher Sims (Princeton University) have confirmed their participation as keynote speakers. Lucrezia Reichlin (London Business School) will moderate a panel discussion with Joshua Chan, Christopher Sims and Matt Taddy (Amazon) on “Current challenges in macroeconomic forecasting and the way ahead”.

We particularly encourage submissions on robust forecasting in the presence of nonlinearities and structural breaks, such as COVID-19; forecasting inflation, real activity, and exchange rates under changing monetary policy frameworks; robust forecasting in the presence of large risks, e.g. related to climate change; modelling and forecasting when facing tail events; machine learning and scalable forecasting methods; big and/or unstructured data and dimension reduction techniques. However, the scope of the conference is not limited to these topics and submissions from all areas of forecasting are welcome.

The deadline for submissions is 23 March 2021.

You can find the call for papers and more details at

In the context of the conference, we are organising a paper competition for PhD students who have a research interest in forecasting. Please advertise this competition in your networks. The call for papers for this competition is online at

Best regards,

Elena BobeicaGabriel Pérez-QuirósGerhard Rünstler and Georg Strasser

Monday, February 15, 2021

Amazing Warming Paper, 1° × 1° Global Resolution!

Check out this paper. It is simultaneously (1) a sufficient statistic for much of the earlier empirical global warming economics research literature, and (2) a massive new contribution.

1° × 1° spatial resolution!

The Economic Geography of Global Warming
Jose Luis Cruz Alvarez and Esteban Rossi-Hansberg NBER w.p. #28466

Sunday, February 14, 2021

A Dynamic Factor Model for COVID Infections

True daily COVID infections are famously unobserved, but they are related to many observed noisy indicators, like  reported infections, reported deaths, hospitalizations, etc., with various leads and lags, various observational frequencies, etc. Sounds just like the ADS setup for business cycle nowcasting, doesn't it?  It would be great to see someone implement an ADS-style dynamic factor model for real-time monitoring of COVID infections.

Monday, February 8, 2021

AI, Machine Learning, and Big Data in Finance and Economics

An exciting new webinar series:

The AI & Big Data in Finance Research Forum (ABFR) is an interdisciplinary community of scholars interested in the methods, applications, and socioeconomic implications of AI and big data. ABFR organizes monthly presentations and discussions of papers from the leading experts in AI and Big Data in finance and economics. The virtual talks are the last Thursday of each month from 12-1pm EST. 

The first talk is February 25, 12-1pm EST.
Presenter: Stefan Nagel (University of Chicago)
Discussant: Kent Daniel (Columbia University)

The next talks are:
3/25 Laura Veldkamp discussed by Ezra Oberfield
4/29 Wei Jiang discussed by Franceso D’Acunto
5/27 Bryan Kelly discussant TBA.

For webinar information and Zoom links see 

To stay up to date, join the mailing list at

ABFR is organized by Svetlana Bryzgalova, Will Cong, Maryam Farboodi and Markus Pelger.  The hosting institutions are the Cornell FinTech Initiative and the Stanford AFTLab. The Advisory Committee includes Kay Giesecke, Gerald Hoberg, Wei Jiang, Bryan Kelly, Stefan Nagel, Andrew Patton, and Laura Veldkamp.

Monday, February 1, 2021

Machine Learning for Realized Volatility Forecasting

Check out this interesting paper.  Lots to think about.

Kim Christensen & Mathias Siggaard & Bezirgen Veliyev, 2021. "A machine learning approach to volatility forecasting," CREATES Research Papers 2021-03, Department of Economics and Business Economics, Aarhus University.

The paper shows that various ML methods outperform HAR for daily forecasting of realized asset-return volatility.  Of course there's nothing particularly interesting about HAR.  What's interesting is long memory, the overwhelmingly dominant feature of asset return realized vol dynamics, and HAR is just an approximate way to capture the long memory while staying in a comfortable linear regression framework.  Anyway, the key unanswered questions raised by the paper is how are the ML methods approximating long memory, and why do they deliver better approximations to long memory than HAR?  It is well known that long-memory and (infrequent) regime-switching are closely linked.  Perhaps the ML methods are picking up infrequent regime switching?  Do they also deliver better approximations than exact long-memory models? 

Sunday, January 24, 2021

Machine Learning Advances for Time Series Forecasting

Check out this fine survey by Masini, Medeiros and Mendes,

For me the coolest thing is new insights into optimal regularization and subset averaging for density forecast mixtures. Amazingly, and very much related to the survey (but not widely recognized, including in the survey), optimally-regularized regression-based combinations and subset-average combinations are VERY closely connected. You can see the connection clearly in both of the papers below, in the first for point forecasts, and in the second for density forecasts. Effectively, the optimal regularization *IS​* subset averaging!

Diebold, F.X. and Shin, M. (2019), "Machine Learning for Regularized Survey Forecast Combination: Partially-Egalitarian Lasso and its Derivatives," International Journal of Forecasting, 35, 1679-1691.

Diebold, F.X., Shin, M. and Zhang, B. (2021), “On the Aggregation of Probability Assessments: Regularized Mixtures of Predictive Densities for Eurozone Inflation and Real Interest Rates,” arXiv:2012.11649.

Thursday, January 21, 2021

Mixtures of Predictive Densities

Here's a new one, with Minchul Shin and Boyuan Zhang, "On the Aggregation of Probability Assessments: Regularized Mixtures of Predictive Densities for Eurozone Inflation and Real Interest Rates".

We propose methods for constructing regularized mixtures of density forecasts, exploring a variety of objectives and regularization penalties, and using them in a substantive exploration of Eurozone inflation and real interest rate density forecasts. The coolest thing is seeing what the regularization actually does. It has very different effects before and after the great recession. From the Great Recession onward, regularization moves density forecast probability mass from the centers to the tails, correcting for overconfidence. And it does so in real time, with no look-ahead cheating...

Tuesday, January 19, 2021

Welcome to 2021

 Welcome back!

I insist that 2021 will be better.  Here's a light one to start it off.  

I recently had occasion to visit the web site of Marcin Zamojski, a top young econometrician at the University of Gothenburg. He describes himself there as:

[I am a] frequentist at heart. I am also a strong believer in 'all models are wrong, but some are useful'. I am warming up to machine learning. If the data has a time dimension, count me in.

Wow!  Is that Marcin Zamoiski or Frank Diebold?