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Optimal univariate inflation forecasting with symmetric stable shocks

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Author Info
Prasad V. Bidarkota (School of Business, La Trobe University, Bundoora, Victoria 3083, Australia)
J. Huston McCulloch (Department of Economics, The Ohio State University, 410 Arps Hall, 1945 North High Street, Columbus, OH 43210, USA)

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Abstract

Monthly inflation in the United States indicates non-normality in the form of either occasional big shocks or marked changes in the level of the series. We develop a univariate state space model with symmetric stable shocks for this series. The non-Gaussian model is estimated by the Sorenson-Alspach filtering algorithm. Even after removing conditional heteroscedasticity, normality is rejected in favour of a stable distribution with exponent 1·83. Our model can be used for forecasting future inflation, and to simulate historical inflation forecasts conditional on the history of inflation. Relative to the Gaussian model, the stable model accounts for outliers and level shifts better, provides tighter estimates of trend inflation, and gives more realistic assessment of uncertainty during confusing episodes. © 1998 John Wiley & Sons, Ltd.

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File URL: http://qed.econ.queensu.ca:80/jae/1998-v13.6/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 13 (1998)
Issue (Month): 6 ()
Pages: 659-670
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Handle: RePEc:jae:japmet:v:13:y:1998:i:6:p:659-670

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  1. J. Huston McCulloch, 2001. "The Inflation Premium implicit in the US Real and Nominal," Computing in Economics and Finance 2001 210, Society for Computational Economics. [Downloadable!]
  2. J Huston McCulloch, 2000. "State-Space Times Series Modeling of Structural Breaks," Working Papers 00-11, Ohio State University, Department of Economics. [Downloadable!]
  3. Jonathan B. Hill, 2005. "On Tail Index Estimation Using Dependent,Heterogenous Data," Working Papers 0512, Florida International University, Department of Economics. [Downloadable!]
  4. J. Huston McCulloch, 2005. "The Kalman Foundations of Adaptive Least Squares: Applications to Unemployment and Inflation," Computing in Economics and Finance 2005 239, Society for Computational Economics. [Downloadable!]
  5. Khurshid M. Kiani, 2006. "Predictability in Stock Returns in an Emerging Market: Evidence from KSE 100 Stock Price Index," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(3), pages 369-381. [Downloadable!]
  6. Prasad V. Bidarkota & Brice V. Dupoyet & J. Huston McCulloch, 2005. "Asset Pricing with Incomplete Information under Stable Shocks," Working Papers 0514, Florida International University, Department of Economics. [Downloadable!]
  7. Prasad V. Bidarkota, 2005. "Risk Premia in Forward Foreign Exchange Markets: A Comparison of Signal Extraction and Regression Methods," Working Papers 0501, Florida International University, Department of Economics. [Downloadable!]
  8. Jonathan B. Hill, 2005. "On Tail Index Estimation for Dependent, Heterogenous Data," Econometrics 0505005, EconWPA, revised 27 May 2005. [Downloadable!]
  9. KIANI, Khurshid M., 2007. "Determination Of Volatility And Mean Returns: An Evidence From An Emerging Stock Market," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 4(1), pages 103-118. [Downloadable!]
  10. Prasad Bidarkota, 2003. "Comparison of Two Alternative Approaches to Modeling Level Shifts in the Presence of Outliers," Working Papers 0307, Florida International University, Department of Economics. [Downloadable!]
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