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Turning Point Prediction for the UK using CSO Leading Indicators

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  • Artis, Michael J

Abstract

This paper examines the performance of alternative models for predicting turning points in the UK growth cycle. The models are based upon an interpretation of movements in the CSO's composite longer and shorter leading indicators. The difference between the models lies in the choice of method adopted for separating and classifying observations into a pattern corresponding to an upturn and downturn regime, together with the decision rule applied in recognizing when a regime shift has occurred. The models involved include a simple mechanical rule based upon an interpretation of consecutive movements in the leading indicator and two probabilistic methods, namely a standard Bayesian model and the sequential probability model developed by Neftci (1982). The results of the exercise suggest that usefulness of the shorter leading index is extremely limited; prediction based upon this series is typically outperformed by naive, non-indicator methods. The information content of the longer leading index appears somewhat greater. The signal extracted by the sequential probability model is particularly well-defined in this respect giving rise to a lead time of between four and six months at peaks and six months for troughs. At horizons beyond six months, however, the sequential probability model is outperformed by a more conventional Bayesian method.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 833.

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Date of creation: Sep 1993
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Handle: RePEc:cpr:ceprdp:833

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Keywords: Prediction; Sequential Probability; Turning Points;

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Cited by:
  1. David Hendry & Michael P. Clements, 2001. "Economic Forecasting: Some Lessons from Recent Research," Economics Papers 2002-W11, Economics Group, Nuffield College, University of Oxford.
  2. Croce, Roberto M. & Haurin, Donald R., 2009. "Predicting turning points in the housing market," Journal of Housing Economics, Elsevier, vol. 18(4), pages 281-293, December.
  3. Lars-Erik Öller & Lasse Koskinen, 2004. "A classifying procedure for signalling turning points," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(3), pages 197-214.
  4. Simon Hayes, 2001. "Leading indicator information in UK equity prices: an assessment of economic tracking portfolios," Bank of England working papers 137, Bank of England.
  5. Denise R. Osborn & Paul W. Simpson, 2000. "Forecasting UK Industrial Production Over the Business Cycle," Econometric Society World Congress 2000 Contributed Papers 1059, Econometric Society.
  6. Andrea Carriero & Massimiliano Marcellino, 2007. "A Comparison of Methods for the Construction of Composite Coincident and Leading Indexes for the UK," Working Papers 590, Queen Mary, University of London, School of Economics and Finance.
  7. Peaucelle, Irina, 1996. "Prévisions de court terme pour analyser les réformes en Russie (les)," CEPREMAP Working Papers (Couverture Orange) 9610, CEPREMAP.
  8. Michele Fratianni & Michael Artis, 1996. "The lira and the pound in the 1992 currency crisis: Fundamentals or speculation?," Open Economies Review, Springer, vol. 7(1), pages 573-589, March.

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