Showing papers by "Francis X. Diebold published in 1986"

The dynamics of exchange rate volatility: a multivariate latent factor ARCH model

Abstract: We study temporal volatility patterns in seven nominal dollar spot exchange rates, all of which display strong evidence of autoregressive conditional heteroskedasticity (ARCH). We first formulate and estimate univariate models, the results of which are subsequently used to guide specification of a multivariate model. The key element of our multivariate approach is exploitation of factor structure, which facilitates tractable estimation via a substantial reduction in the number of parameters to be estimated. Such a latent-variable model is shown to provide a good description of multivariate exchange rate movements: the ARCH effects capture volatility clustering, and the factor structure captures commonality in volatility movements across exchange rates.

Structural change and the combination of forecasts

Abstract: Forecasters are generally concerned about the properties of model-based predictions in the presence of structural change. In this paper, it is argued that forecast errors can under those conditions be greatly reduced through systematic combination of forecasts. We propose various extensions of the standard regression-based theory of forecast combination. Rolling weighted least squares and time-varying parameter techniques are shown to be useful generalizations of the basic framework. Numerical examples, based on various types of structural change in the constituent forecasts, indicate that the potential reduction in forecast error variance through these methods is very significant. The adaptive nature of these updating procedures greatly enhances the effect of risk-spreading embodied in standard combination techniques.