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Comparing the forecasting ability of financial conditions indices: The case of South Africa

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  • Balcilar, Mehmet
  • Gupta, Rangan
  • van Eyden, Reneé
  • Thompson, Kirsten
  • Majumdar, Anandamayee
Abstract
In this paper we test the forecasting ability of three estimated financial conditions indices (FCIs) with respect to key macroeconomic variables of output growth, inflation and interest rates. We do this by forecasting the aforementioned macroeconomic variables based on the information contained in the three alternative FCIs using a Bayesian VAR (BVAR), nonlinear logistic vector smooth transition autoregression (VSTAR) and nonparametric (NP) and semi-parametric (SP) regressions, and compare the results with the standard benchmarks of random-walk, univariate autoregressive and classical VAR models. The three FCIs are constructed using rolling-window principal component analysis (PCA), dynamic model averaging (DMA) in the context of a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model, and a time-varying parameter vector autoregressive (TVP-VAR) model with constant factor loadings. Our results suggest that the VSTAR model performs best in the case of forecasting output and inflation, while a SP specification proves to be the best for forecasting the interest rate. More importantly, statistical testing for significant differences in forecast errors across models corroborates the finding of superior predictive ability of the nonlinear models.

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  • Balcilar, Mehmet & Gupta, Rangan & van Eyden, Reneé & Thompson, Kirsten & Majumdar, Anandamayee, 2018. "Comparing the forecasting ability of financial conditions indices: The case of South Africa," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 245-259.
    • Handle: RePEc:eee:quaeco:v:69:y:2018:i:c:p:245-259
    DOI: 10.1016/j.qref.2018.03.012
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    Cited by:

    1. Mehmet Balcilar & David Roubaud & Ojonugwa Usman & Mark E. Wohar, 2021. "Testing the asymmetric effects of exchange rate pass‐through in BRICS countries: Does the state of the economy matter?," The World Economy, Wiley Blackwell, vol. 44(1), pages 188-233, January.
    2. Nima Nonejad, 2021. "An Overview Of Dynamic Model Averaging Techniques In Time‐Series Econometrics," Journal of Economic Surveys, Wiley Blackwell, vol. 35(2), pages 566-614, April.
    3. Balcilar, Mehmet & Ozdemir, Zeynel Abidin & Ozdemir, Huseyin & Wohar, Mark E., 2020. "Fed’s unconventional monetary policy and risk spillover in the US financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 42-52.
    4. Balcilar, Mehmet & Roubaud, David & Usman, Ojonugwa & Wohar, Mark E., 2021. "Moving out of the linear rut: A period-specific and regime-dependent exchange rate and oil price pass-through in the BRICS countries," Energy Economics, Elsevier, vol. 98(C).
    5. Kaelo Ntwaepelo & Grivas Chiyaba, 2022. "Financial Stability Surveillance Tools: Evaluating the Performance of Stress Indices," Economics Discussion Papers em-dp2022-06, Department of Economics, University of Reading.
    6. Lulu Yang & Yankai Gai & An Zhang & Lihui Wang, 2024. "Analysis of the Impact of U.S. Trade Policy Uncertainty on China’s Grain Trade," Sustainability, MDPI, vol. 16(11), pages 1-23, May.
    7. Mehmet Balcilar & David Roubaud & Ojonugwa Usman & Mark E. Wohar, 2019. "Testing the Asymmetric Effects of Exchange Rate and Oil Price Pass-Through in BRICS Countries: Does the state of the economy matter?," Working Papers 15-49, Eastern Mediterranean University, Department of Economics.
    8. Adél Bosch & Steven F. Koch, 2020. "The South African Financial Cycle and its Relation to Household Deleveraging," South African Journal of Economics, Economic Society of South Africa, vol. 88(2), pages 145-173, June.
    9. Manamani SAHOO, 2017. "Financial conditions index (FCI), inflation and growth: Some evidence," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(612), A), pages 147-172, Autumn.

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    More about this item

    Keywords

    Financial conditions index; Dynamic model averaging; Nonlinear logistic smooth transition vector autoregressive model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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