Archive for November 23rd, 2007

Forecasting is difficult even in US

November 23, 2007

Due to considerable hype around the minutes (For the first time, the minutes  would include projections from all the FOMC members on macro variables) of the FOMC meeting held on October 30-31, this wonderful paper didn’t get as much coverage as it should have.

The paper was mentioned in Bernanke’s last speech (check footnote no. 7) where he explained the importance of communications in setting Monetary Policy and the rationale for the same.

The paper has looked at previous forecasts and analyses how much projections differ from actuals. The abstract says it all:

Participants in meetings of the Federal Open Market Committee (FOMC) regularly produce individual projections of real activity and inflation that are published in summary form. These summaries indicate participants’ views about the most likely course for the macroeconomy but, by themselves, are not enough to gauge the full range of possible outcomes — that is, the uncertainty surrounding the outlook. To this end, FOMC participants will now provide qualitative assessments of how they view the degree of current uncertainty relative to that which prevailed on average in the past. This paper discusses a method for gauging the average magnitude of historical uncertainty using information on the predictive accuracy of a number of private and government forecasters. The results suggest that, if past performance is a reasonable guide to the accuracy of future forecasts, considerable uncertainty surrounds all macroeconomic projections, including those of FOMC participants.

It basically says there are many errors and past information may not be good enough to make future projections. There is a lot of uncertainly involved. The results would surely bring smile to Fama and his followers/fans.

This comes from US markets which is a well-developed economy where we have number of data sets across categories and time. If there is so much difference between actual and forecast in US economy, we can well understand the problems with forecasting in other economies.

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What is a CDO?

November 23, 2007

The hybrid, hi-fi finance is something I always struggle with. I understand the basics but if asked to put it in word would struggle quite a bit. It is much easier to write on basic economics and finance issues.

For instance what is Collateralized Debt Obligations or CDO? I know it but cannot explain.

Susan Black and Alan Rai of Reserve Bank of Australia have written an excellent primeron CDO which is a must read. They start with how it is structured (also show the balance sheet of a CDO), explain the differences between the various types and the Australian market for the same.

Excellent stuff.

Assorted Links

November 23, 2007

1. WSJ Blog points to nine things for which we need to bethankful. I liked the 9th one quite a bit 🙂

2. New Economist points to Hufei- the Chinese Silicon Valley.

3. Ajay Shah points to the first conference of NIPFP-DEA research program.


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