Forecasting China's foreign exchange reserves using dynamic model averaging: The roles of macroeconomic fundamentals,financial stress and economic uncertainty

We develop models for examining possible predictors of growth of China's foreign exchange reserves that embrace Chinese and global trade, financial and risk (uncertainty) factors. Specifically, by comparing with other alternative models, we show that the dynamic model averaging (DMA) and dynamic model selection (DMS) models outperform not only linear models (such as random walk, recursive OLS-AR(1) models, recursive OLS with all predictive variables models) but also the Bayesian model averaging (BMA) model for examining possible predictors of growth of those reserves. The DMS is the best overall across all forecast horizons. While some predictors matter more than others over the forecast horizons, there are few that stand the test of time. The US–China interest rate differential has a superior predictive power among the 13 predictors considered, followed by the nominal effective exchange rate and the interest rate spread for most of the forecast horizons. The relative predictive prowess of the oil and copper prices alternates, depending on the commodity cycles. Policy implications are also provided.     

Representation,estimation and forecasting of the multivariate index-augmented autoregressive model

We examine the conditions under which each individual series that is generated by a vector autoregressive model can be represented as an autoregressive model that is augmented with the lags of a few linear combinations of all the variables in the system. We call this multivariate index-augmented autoregression (MIAAR) modelling. We show that the parameters of the MIAAR can be estimated by a switching algorithm that increases the Gaussian likelihood at each iteration. Since maximum likelihood estimation may perform poorly when the number of parameters increases, we propose a regularized version of our algorithm for handling a medium–large number of time series. We illustrate the usefulness of the MIAAR modelling by both empirical applications and simulations.