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R2 bounds for predictive models: what univariate properties tell us about multivariate predictability

Stephen Wright (), James Mitchell () and Donald Robertson
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Donald Robertson: University of Cambridge

No 1804, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: A longstanding puzzle in macroeconomic forecasting has been that a wide variety of multivariate models have struggled to out-predict univariate models consistently. We seek an explanation for this puzzle in terms of population properties. We derive bounds for the predictive R2 of the true, but unknown, multivariate model from univariate ARMA parameters alone. These bounds can be quite tight, implying little forecasting gain even if we knew the true multivariate model. We illustrate using CPI inflation data and the Eurozone in a specification motivated by a preferred-habitat model to test for monetary policy transmission domestically and internationally. Our findings suggest an impact of monetary policy on variance processes only and provides evidence for an international channel of monetary transmission on both money and capital markets. This is, to our knowledge, the first attempt to use search-engine data in the context of monetary policy.

Keywords: attention; internet search; Google; monetary policy; ECB; FED; international financial markets; macro-finance; sovereign bonds; international finance; bond markets; preferred habitat models. (search for similar items in EconPapers)
JEL-codes: C22 C32 C53 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-big, nep-ecm, nep-for and nep-mac
Date: 2018-04
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http://eprints.bbk.ac.uk/id/eprint/26851 First version, 2018 (application/pdf)

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