We propose a Bayesian procedure for exploiting small, possibly long-lag linear predictability in the innovations of a finite order autoregression. We model the innovations as having a log-spectral density that is a continuous mean-zero Gaussian process of order 1/√T. This local embedding makes...

An appropriate metric for the success of an algorithm to forecast the variance of the rate of return on a capital asset could be the incremental profit from substituting it for the next best alternative. We propose a framework to assess incremental profits for competing algorithms to forecast...

Stock trading has tremendous importance not just as a profession but also as an income source for individuals. Many investment account holders use the appreciation of their portfolio (as a combination of stocks or indexes) as income for their retirement years, mostly betting on stocks or indexes...

This paper develops a vector autoregression (VAR) for time series which are observed at mixed frequencies - quarterly and monthly. The model is cast in state-space form and estimated with Bayesian methods under a Minnesota-style prior. We show how to evaluate the marginal data density to...

Volatility permeates modern financial theories and decision making processes. As such, accurate measures and good forecasts of future volatility are critical for the implementation and evaluation of asset pricing theories. In response to this, a voluminous literature has emerged for modeling the...

A companion paper (Nelson (1992)) showed that in data observed at high frequencies, an ARCH model may do a good job at estimating conditional variances, even when the ARCH model is severely misspecified. While such models may perform reasonably well at filtering (i.e., at estimating unobserved...

We provide maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firm-specific and macroeconomic covariates. We find evidence in the U.S. industrial machinery and instruments sector, based on...

Using research designs patterned after randomized experiments, many recent economic studies examine outcome measures for treatment groups and comparison groups that are not randomly assigned. By using variation in explanatory variables generated by changes in state laws, government draft...

We compare the out-of-sample forecasting performance of univariate homoskedastic, GARCH, autoregressive and nonparametric models for conditional variances, using five bilateral weekly exchange rates for the dollar, 1973-1989. For a one week horizon, GARCH models tend to make slightly more...

Exchange rate forecasts are generated using some popular monetary models of exchange rates in conjunction with several estimation techniques. We propose an alternative set of criteria for evaluating forecast rationality which entails the following requirements: the forecast and the actual series...