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Modeling the dynamics of EU economic sentiment indicators: an interaction-based approach

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  • Ghonghadze, Jaba
  • Lux, Thomas

Abstract

This paper estimates a simple univariate model of expectation or opinion formation in continuous time adapting a 'canonical' stochastic model of collective opinion dynamics (Weidlich and Haag, 1983; Lux, 1995, 2007). This framework is applied to a selected data set on survey-based expectations from the rich EU business and consumer survey database for twelve European countries. The model parameters are estimated through maximum likelihood and numerical solution of the transient probability density functions for the resulting stochastic process. The model's performance is assessed with respect to its out-of-sample forecasting capacity relative to univariate time series models of the ARMA(p; q) and ARFIMA(p; d; q) varieties. These tests speak for a slight superiority of the canonical opinion dynamics model over the alternatives in the majority of cases.

Suggested Citation

  • Ghonghadze, Jaba & Lux, Thomas, 2009. "Modeling the dynamics of EU economic sentiment indicators: an interaction-based approach," Kiel Working Papers 1487, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1487
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    References listed on IDEAS

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    8. Alfarano, Simone & Lux, Thomas, 2007. "A Noise Trader Model As A Generator Of Apparent Financial Power Laws And Long Memory," Macroeconomic Dynamics, Cambridge University Press, vol. 11(S1), pages 80-101, November.
    9. Stan Hurn & J.Jeisman & K.A. Lindsay, 2006. "Teaching an old dog new tricks: Improved estimation of the parameters of SDEs by numerical solution of the Fokker-Planck equation," Stan Hurn Discussion Papers 2006-01, School of Economics and Finance, Queensland University of Technology.
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    Cited by:

    1. Dimitrios D. Thomakos & Fotis Papailias, 2014. "“Out of Sync”: The Breakdown of Economic Sentiment Cycles in the EU," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 131-150, February.
    2. Demary, Markus, 2010. "Transaction taxes and traders with heterogeneous investment horizons in an agent-based financial market model," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 4, pages 1-44.

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    More about this item

    Keywords

    Expectation formation; survey-based expectations; opinion dynamics; Fokker-Planck equation; forecasting;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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