R. Casarin (Roberto)
http://repub.eur.nl/ppl/27640/
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http://repub.eur.nl/
RePub, Erasmus University RepositoryTime-varying combinations of predictive densities using nonlinear filtering
http://repub.eur.nl/pub/51721/
Sun, 01 Dec 2013 00:00:01 GMT<div>M. Billio</div><div>R. Casarin</div><div>F. Ravazzolo</div><div>H.K. van Dijk</div>
__Abstract__
We propose a Bayesian combination approach for multivariate predictive densities which relies upon a distributional state space representation of the combination weights. Several specifications of multivariate time-varying weights are introduced with a particular focus on weight dynamics driven by the past performance of the predictive densities and the use of learning mechanisms. In the proposed approach the model set can be incomplete, meaning that all models can be individually misspecified. A Sequential Monte Carlo method is proposed to approximate the filtering and predictive densities. The combination approach is assessed using statistical and utility-based performance measures for evaluating density forecasts of simulated data, US macroeconomic time series and surveys of stock market prices. Simulation results indicate that, for a set of linear autoregressive models, the combination strategy is successful in selecting, with probability close to one, the true model when the model set is complete and it is able to detect parameter instability when the model set includes the true model that has generated subsamples of data. Also, substantial uncertainty appears in the weights when predictors are similar; residual uncertainty reduces when the model set is complete; and learning reduces this uncertainty. For the macro series we find that incompleteness of the models is relatively large in the 1970's, the beginning of the 1980's and during the recent financial crisis, and lower during the Great Moderation; the predicted probabilities of recession accurately compare with the NBER business cycle dating; model weights have substantial uncertainty attached. With respect to returns of the S&P 500 series, we find that an investment strategy using a combination of predictions from professional forecasters and from a white noise model puts more weight on the white noise model in the beginning of the 1990's and switches to giving more weight to the professional forecasts over time. Information on the complete predictive distribution and not just on some moments turns out to be very important, above all during turbulent times such as the recent financial crisis. More generally, the proposed distributional state space representation offers great flexibility in combining densities.Interactions between Eurozone and US
Booms and Busts:
A Bayesian Panel Markov-switching VAR
Model
http://repub.eur.nl/pub/50275/
Wed, 11 Sep 2013 00:00:01 GMT<div>M. Billio</div><div>R. Casarin</div><div>F. Ravazzolo</div><div>H.K. van Dijk</div>
__Abstract__
Interactions between the eurozone and US booms and busts and among major eurozone economies are analyzed by introducing a panel Markov-switching VAR model well suitable for a multi-country cyclical analysis. The model accommodates changes in low and high data frequencies and endogenous time-varying transition matrices of the country-specific Markov chains. The transition matrix of each Markov chain depends on its own past history and on the history of the other chains, thus allowing for modeling of the interactions between cycles. An endogenous common eurozone cycle is derived by aggregating country-specific cycles. The model is estimated using a simulation based Bayesian approach in which an efficient multi-move strategy algorithm is defined to draw common time-varying Markov-switching chains. Our results show that the US and eurozone cycles are not fully synchronized over the 1991-2013 sample period, with evidence of more recessions in the Eurozone. Shocks affect the US 1-quarter in advance of the eurozone, but these spread very rapidly among economies. An increase in the number of eurozone countries in recession increases the probability of the US to stay within recession, while the US recession indicator has a negative impact on the probability to stay in recession for eurozone countries. Turning point analysis shows that the cycles of Germany, France and Italy are closer to the US cycle than other countries. Belgium, Spain, and Germany, provide more timely information on the aggregate recession than Netherlands and France.Parallel Sequential Monte Carlo for
Efficient Density Combination:
The Deco Matlab Toolbox
http://repub.eur.nl/pub/39840/
Mon, 08 Apr 2013 00:00:01 GMT<div>R. Casarin</div><div>S. Grassi</div><div>F. Ravazzolo</div><div>H.K. van Dijk</div>
This paper presents the Matlab package DeCo (Density Combination) which is based on the paper by Billio et al. (2013) where a constructive Bayesian approach is presented for combining predictive densities originating from different models or other sources of information. The combination weights are time-varying and may depend on past predictive forecasting performances and other learning mechanisms. The core algorithm is the function DeCo which applies banks of parallel Sequential Monte Carlo algorithms to filter the time-varying combination weights. The DeCo procedure has been implemented both for standard CPU computing and for Graphical Process Unit (GPU) parallel computing. For the GPU implementation we use the Matlab parallel computing toolbox and show how to use General Purposes GPU computing almost effortless. This GPU implementation comes with a speed up of the execution time up to seventy times compared to a standard CPU Matlab implementation on a multicore CPU. We show the use of the package and the computational gain of the GPU version, through some simulation experiments and empirical applications.
Risk management of risk under the Basel Accord: A Bayesian approach to forecasting Value-at-Risk of VIX futures
http://repub.eur.nl/pub/76727/
Tue, 01 Jan 2013 00:00:01 GMT<div>R. Casarin</div><div>C-L. Chang</div><div>J.A. Jiménez-Martín</div><div>M.J. McAleer</div><div>T. Pérez-Amaral</div>
It is well known that the Basel II Accord requires banks and other Authorized Deposit-taking Institutions (ADIs) to communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models, whether individually or as combinations, to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. Previous papers proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper, using Bayesian and non-Bayesian combinations of models addresses the question of risk management of risk, namely VaR of VIX futures prices, and extends the approaches given in previous papers to examine how different risk management strategies performed during the 2008-2009 global financial crisis (GFC). The use of time-varying weights using Bayesian methods, allows dynamic combinations of the different models to obtain a more accurate VaR forecasts than the estimates and forecasts that might be produced by a single model of risk. One of these dynamic combinations is endogenously determined by the pass performance in terms of daily capital charges of the individual models. This can improve the strategies to minimize daily capital charges, which is a central objective of ADIs. The empirical results suggest that an aggressive strategy of choosing the Supremum of single model forecasts, as compared with Bayesian and non-Bayesian combinations of models, is preferred to other alternatives, and is robust during the GFC.Time-varying Combinations of Predictive Densities using Nonlinear Filtering
http://repub.eur.nl/pub/38198/
Mon, 29 Oct 2012 00:00:01 GMT<div>M. Billio</div><div>R. Casarin</div><div>F. Ravazzolo</div><div>H.K. van Dijk</div>
We propose a Bayesian combination approach for multivariate predictive densities which relies upon a distributional state space representation of the combination weights. Several specifications of multivariate time-varying weights are introduced with a particular focus on weight dynamics driven by the past performance of the predictive densities and the use of learning mechanisms. In the proposed approach the model set can be incomplete, meaning that all models can be individually misspecified. A Sequential Monte Carlo method is proposed to approximate the filtering and predictive densities. The combination approach is assessed using statistical and utility-based performance measures for evaluating density forecasts. Simulation results indicate that, for a set of linear autoregressive models, the combination strategy is successful in selecting, with probability close to one, the true model when the model set is complete and it is able to detect parameter instability when the model set includes the true model that has generated subsamples of data. For the macro series we find that incompleteness of the models is relatively large in the 70's, the beginning of the 80's and during the recent financial crisis, and lower during the Great Moderation. With respect to returns of the S&P 500 series, we find that an investment strategy using a combination of predictions from professional forecasters and from a white noise model puts more weight on the white noise model in the beginning of the 90's and switches to giving more weight to the professional forecasts over time.
Combination schemes for turning point predictions
http://repub.eur.nl/pub/37707/
Thu, 13 Sep 2012 00:00:01 GMT<div>M. Billio</div><div>R. Casarin</div><div>F. Ravazzolo</div><div>H.K. van Dijk</div>
We propose new forecast combination schemes for predicting turning points of business cycles. The proposed combination schemes are based on the forecasting performances of a given set of models with the aim to provide better turning point predictions. In particular, we consider predictions generated by autoregressive (AR) and Markov-switching AR models, which are commonly used for business cycle analysis. In order to account for parameter uncertainty we consider a Bayesian approach for both estimation and prediction and compare, in terms of statistical accuracy, the individual models and the combined turning point predictions for the United States and the Euro area business cycles.Combining Predictive Densities using Nonlinear Filtering with Applications to US Economics Data
http://repub.eur.nl/pub/30684/
Wed, 30 Nov 2011 00:00:01 GMT<div>M. Billio</div><div>R. Casarin</div><div>F. Ravazzolo</div><div>H.K. van Dijk</div>
We propose a multivariate combination approach to prediction based on a distributional state space representation of the weights belonging to a set of Bayesian predictive densities which have been obtained from alternative models. Several specifications of multivariate time-varying weights are introduced with a particular focus on weight dynamics driven by the past performance of the predictive densities and the use of learning mechanisms. In the proposed approach the model set can be incomplete, meaning that all models are individually misspecified. The approach is assessed using statistical and utility-based performance measures for evaluating density forecasts of US macroeconomic time series and surveys of stock market prices. For the macro series we find that incompleteness of the models is relatively large in the 70's, the beginning of the 80's and during the recent financial crisis; structural changes like the Great Moderation are empirically identified by our model combination and the predicted probabilities of recession accurately compare with the NBER business cycle dating. Model weights have substantial uncertainty attached and neglecting this may seriously affect results. With respect to returns of the S&P 500 series, we find that an investment strategy using a combination of predictions from professional forecasters and from a white noise model puts more weight on the white noise model in the beginning of the 90's and switches to giving more weight to the left tail of the professional forecasts during the start of the financial crisis around 2008.Risk Management of Risk Under the Basel Accord: A Bayesian Approach to Forecasting Value-at-Risk of VIX Futures
http://repub.eur.nl/pub/25614/
Fri, 01 Jul 2011 00:00:01 GMT<div>R. Casarin</div><div>C-L. Chang</div><div>J.A. Jiménez-Martín</div><div>M.J. McAleer</div><div>T. Pérez-Amaral</div>
It is well known that the Basel II Accord requires banks and other Authorized Deposit-taking Institutions (ADIs) to communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models, whether individually or as combinations, to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. McAleer et al. (2009) proposed a new approach to model selection for predicting VaR, consisting of combining alternative risk models, and comparing conservative and aggressive strategies for choosing between VaR models. This paper addresses the question of risk management of risk, namely VaR of VIX futures prices, and extends the approaches given in McAleer et al. (2009) and Chang et al. (2011) to examine how different risk management strategies performed during the 2008-09 global financial crisis (GFC). The empirical results suggest that an aggressive strategy of choosing the Supremum of single model forecasts, as compared with Bayesian and non-Bayesian combinations of models, is preferred to other alternatives, and is robust during the GFC. However, this strategy implies relatively high numbers of violations and accumulated losses, which are admissible under the Basel II Accord. Bayesian Combinations of Stock Price Predictions with an Application to the Amsterdam Exchange Index
http://repub.eur.nl/pub/23459/
Mon, 02 May 2011 00:00:01 GMT<div>M. Billio</div><div>R. Casarin</div><div>F. Ravazzolo</div><div>H.K. van Dijk</div>
We summarize the general combination approach by Billio et al. [2010]. In the combination model the weights follow logistic autoregressive processes, change over time and their dynamics are possible driven by the past forecasting performances of the predictive densities. For illustrative purposes we apply it to combine White Noise and GARCH models to forecast the Amsterdam Exchange index and use the combined predictive forecasts in an investment asset allocation exercise.Combining Predictive Densities using Bayesian Filtering with Applications to US Economics Data
http://repub.eur.nl/pub/22330/
Tue, 04 Jan 2011 00:00:01 GMT<div>M. Billio</div><div>R. Casarin</div><div>F. Ravazzolo</div><div>H.K. van Dijk</div>
Using a Bayesian framework this paper provides a multivariate combination approach to prediction based on a distributional state space representation of predictive densities from alternative models. In the proposed approach the model set can be incomplete. Several multivariate time-varying combination strategies are introduced. In particular, a weight dynamics driven by the past performance of the predictive densities is considered and the use of learning mechanisms. The approach is assessed using statistical and utility-based performance measures for evaluating density forecasts of US macroeconomic time series and of surveys of stock market prices.