Forecasting Economic and Financial Variables with Global VARs

67 Pages Posted: 6 Feb 2008

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

L. Vanessa Smith

University of York

Til Schuermann

Oliver Wyman

Date Written: March 2008

Abstract

This paper considers the problem of forecasting real and financial macroeconomic variables across a large number of countries in the global economy. To this end a global vector autoregressive (GVAR) model previously estimated over the 1979Q1-2003Q4 period by Dees, de Mauro, Pesaran, and Smith (2007), is used to generate out-of-sample one quarter and four quarters ahead forecasts of real output, inflation, real equity prices, exchange rates and interest rates over the period 2004Q1-2005Q4. Forecasts are obtained for 134 variables from 26 regions made up of 33 countries covering about 90% of world output. The forecasts are compared to typical benchmarks: univariate autoregressive and random walk models. Building on the forecast combination literature, the effects of model and estimation uncertainty on forecast outcomes are examined by pooling forecasts obtained from different GVAR models estimated over alternative sample periods. Given the size of the modeling problem, and the heterogeneity of economies considered ¿ industrialised, emerging, and less developed countries ¿ as well as the very real likelihood of possibly multiple structural breaks, averaging forecasts across both models and windows makes a significant difference. Indeed the double-averaged GVAR forecasts performed better than the benchmark competitors, especially for output, inflation and real equity prices.

Keywords: forecasting using GVAR, structural breaks and forecasting, average forecasts across models and windows, financial and macroeconomic forecasts

JEL Classification: C32, C51, C53

Suggested Citation

Pesaran, M. Hashem and Smith, L. Vanessa and Schuermann, Til, Forecasting Economic and Financial Variables with Global VARs (March 2008). CESifo Working Paper Series No. 2263; IEPR Working Paper No. 08.2; FRB of New York Staff Report, No. 317; Wharton Financial Institutions Center Working Paper No. 08-05. Available at SSRN: https://ssrn.com/abstract=1089456

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

L. Vanessa Smith

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

Til Schuermann

Oliver Wyman ( email )

1166 6th Avenue
New York City, NY
United States

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