A MIDAS Approach to Modeling First and Second Moment Dynamics

41 Pages Posted: 26 Jul 2014 Last revised: 19 Sep 2015

See all articles by Davide Pettenuzzo

Davide Pettenuzzo

Brandeis University - International Business School

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Rossen I. Valkanov

University of California, San Diego (UCSD) - Rady School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2015

Abstract

We propose a new approach to predictive density modeling that allows for MIDAS effects in both the first and second moments of the outcome. Specifically, our modeling approach allows for MIDAS stochastic volatility dynamics, generalizing a large literature focusing on MIDAS effects in the conditional mean, and allows the models to be estimated by means of standard Gibbs sampling methods. When applied to monthly time series on growth in industrial production and inflation, we find strong evidence that the introduction of MIDAS effects in the volatility equation leads to improved in-sample and out-of-sample density forecasts. Our results also suggest that model combination schemes assign high weight to MIDAS-in-volatility models and produce consistent gains in out-of-sample predictive performance.

Keywords: MIDAS regressions; Bayesian estimation; stochastic volatility; out-of-sample forecasts; GDP growth

JEL Classification: C53; C11; C32; E37

Suggested Citation

Pettenuzzo, Davide and Timmermann, Allan and Valkanov, Rossen, A MIDAS Approach to Modeling First and Second Moment Dynamics (September 15, 2015). Available at SSRN: https://ssrn.com/abstract=2471287 or http://dx.doi.org/10.2139/ssrn.2471287

Davide Pettenuzzo (Contact Author)

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

Allan Timmermann

UCSD ( email )

9500 Gilman Drive
La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Rossen Valkanov

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858-534-0898 (Phone)

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