Research

The research programme will be organised around three main themes spanning finance, international macroeconomics and econometrics. The Center will normally support research programmes for a period of two years. The presumption is that further work will be supported by externally raised funds from private sources or government and international funding bodies.

Research topics to be supported by the Center include (summaries provided below):

• Analysis of transmission mechanisms across countries and markets, real and financial, within a global context (using the GVAR methodology)
• Emergence of China and its effects on US, Europe and Latin America
• Empirical analysis of financial crisis, contagion and herding behavior
• Econometric analysis of liquidity in financial markets
• Multivariate volatility modelling and risk diversification
• Forecasting and Market Efficiency

This research considers the problems facing decision makers (particularly in financial institutions) using econometric models in real time.

It identifies the key stages involved and highlights the role of automated systems in reducing the effect of data snooping. It sets out many choices that researchers face in the construction of automated systems and discusses some of the possible ways advanced in the literature for dealing with them.

The role of feedback from the decision maker’s actions to the data generating process is another important topic with implications for financial engineering and decision making by governments and central bankers.

The recent crisis has been a timely reminder of the perils of forecasting financial markets. The problem is particularly serious when markets and economies are subject to major technological, political and institutional changes.

But anticipating major breaks in economic relations is not easy, particularly if breaks occur close to the point at which forecasts are made. One strategy of dealing with such breaks is to develop forecasting strategies that are reasonably robust to breaks. Examples of such approaches include down-weighting of observations, the use of rolling windows and pooling of forecasts obtained over different estimation windows.

At CAFE we hope to build on these developments and explore the use of panels and pooling techniques to minimize the risks associated with forecasting in presence of structural breaks.

Some of the major research topics to be undertaken by CAFE attempt to address many aspects of macroeconomic and financial developments that have been significantly influenced by increased globalization and financial market integration, particularly over the past two decades.

One area of interest is the analysis of financial crises and the mechanisms underlying them. Contagion between different markets and countries and herding behavior is based on the idea that economic agents, e.g., investors sometimes have incentives to imitate each other in their decision making and these mass movements result in major fluctuations and crises in speculative markets. Another major research project focuses on the macroeconomic consequences of globalization and openness, which is changing the linkages and transmission mechanisms between different markets, countries and macroeconomic policies. The newly developed global model (known as the GVAR) will be used for these purposes. This is a relatively novel approach to global macroeconomic modelling that combines time series, panel data, and factor analysis techniques to address a wide set of issues and problems.

The GVAR approach has so far been used to study the transmission of shocks to US real equity prices, short term interest rates and oil prices on the euro area. It has been employed in forecasting economic and financial variables across a large number of countries in the global economy, in the analysis of the impact of the credit crunch in the US on advanced and emerging market economies, and the effects of the emergence of China in the global economy on Latin America.

The forthcoming book, The GVAR Handbook: Structure and Applications of a Macro Model of the Global Economy for Policy Analysis (by Filippo di Mauro and Hashem Pesaran) provides further applications of the GVAR model to the global economy.

GVAR Handbook: Structure and Applications of a Macro Model of the Global Economy for Policy Analysis

Computer codes and data for running the GVAR model for forecasting and shock scenario analysis can be downloaded from the following site:

Computer codes and data for running the GVAR model for forecasting and shock scenario analysis