Financial Engineering Practitioners Seminar
This seminar is in partnership between Global Risk Institute and Industrial Engineering and Operations Research at Columbia University.
The presentation is based on this paper: Dynamic prediction pools: An investigation of financial frictions and forecasting performance
A novel methodology is applied for estimating time-varying weights in linear prediction pools, which is called Dynamic Pools, and used to investigate the relative forecasting performance of DSGE models with and without financial frictions for output growth and inflation from 1992 to 2011. Researchers find strong evidence of time variation in the pool’s weights, reflecting the fact that the DSGE model with financial frictions produces superior forecasts in periods of financial distress but does not perform as well in tranquil periods. The dynamic pool’s weights react in a timely fashion to changes in the environment, leading to real-time forecast improvements relative to other methods of density forecast combination, such as equal-weights combination, Bayesian model averaging, optimal static pools, and dynamic model averaging. The researchers show how a policymaker dealing with model uncertainty could have used a dynamic pool to perform a counterfactual exercise (responding to the gap in labor market conditions) in the immediate aftermath of the Lehman crisis.
Marco Del Negro is a Vice President in the Macroeconomics and Monetary Studies Function of the Research and Statistics Group. Mr. Del Negro's research focuses on the use of general equilibrium models in forecasting and policy analysis. Before joining the Bank, he was a research economist and associate policy adviser with the Macro group of the research department of the Federal Reserve Bank of Atlanta. Mr. Del Negro has published work in the American Economic Review, American Economic Journal: Macroeconomics, Journal of Econometrics, Journal of Applied Econometrics, Journal of International Economics, Journal of Monetary Economics, Journal of Money, Credit and Banking, International Economic Review, Journal of the European Economic Association, and the Review of Economic Studies.