Comparing the Forecasting Ability of Financial Conditions Indices: The Case of South Africa

Mehmet Balcilar, Rangan Gupta, Renee van Eyden () and Kirsten Thompson ()
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Kirsten Thompson: Department of Economics, University of Pretoria

No 15-06, Working Papers from Eastern Mediterranean University, Department of Economics

Abstract: In this paper we test the forecasting ability of three estimated financial conditions indices (FCIs) with respect to key macroeconomic variables of output growth, inflation and interest rates. We do this by forecasting the aforementioned macroeconomic variables based on the information contained in the three alternative FCIs using a Bayesian VAR (BVAR), nonlinear logistic vector smooth transition autoregression (VSTAR) and nonparametric (NP) and semi-parametric (SP) regressions, and compare the results with the standard benchmarks of random-walk, univariate autoregressive and classical VAR models. The three FCIs are constructed using rolling-window principal component analysis (PCA), dynamic model averaging (DMA) in the context of a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model, and a time-varying parameter vector autoregressive (TVP-VAR) model with constant factor loadings. Our results suggest that the VSTAR model performs best in the case of forecasting manufacturing production and inflation, while a SP specification proves to be the best for forecasting the interest rate. More importantly, statistics testing for significant differences in forecast errors across models corroborate the finding of superior predictive ability of the nonlinear models.

Keywords: Financial conditions index; dynamic model averaging; nonlinear logistic smooth transition vector autoregressive model (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 G01 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015
New Economics Papers: this item is included in nep-for, nep-ger and nep-mac
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http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-06.pdf First version, 2015 (application/pdf)

Related works:
Journal Article: Comparing the forecasting ability of financial conditions indices: The case of South Africa (2018)
Working Paper: Comparing the Forecasting Ability of Financial Conditions Indices: The Case of South Africa (2015)
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