Three Essays on Updating Forecasts in Vector Autoregression Models

Abstract

Forecasting firms' earnings has long been an interest of market participants and academics. Traditional forecasting studies in a multivariate time series setting do not take into account that the timing of market data release for a specific time period of observation is often spread over several days or weeks. This thesis focuses on the separation of announcement timing or data release and the use of econometric real-time methods, which we refer to as an updated vector autoregression (VAR) forecast, to predict data that have yet to be released. In comparison to standard time series forecasting, we show that the updated forecasts will be more accurate the higher the correlation coefficients among the standard VAR innovations are. Forecasting with the sequential release of information has not been studied in the VAR framework, and our approach to U.S. nonfarm payroll employment and the six Canadian banks shows its value. By using the updated VAR forecast, we conclude that there are relative efficiency gains in the one-step-ahead forecast compared to the ordinary VAR forecast, and compared to professional consensus forecasts. Thought experiments emphasize that the release ordering is crucial in determining forecast accuracy.