CFA L3 learning notes-CME-major approaches to economic forecasting
LOS-compare major approaches to economic forecasting
Major approaches to economic forecasting include:
1.Econometric models: These models use statistical methods to estimate relationships among economic variables based on economic theory. They can provide quantitative estimates of the impact of changes in exogenous variables.
However, they are complex, time-consuming to formulate, and may not accurately forecast turning points in the business cycle.
2.Economic indicators: These are economic statistics that reflect an economy’s recent past or current position in the business cycle. Leading indicators, in particular, provide information about upcoming changes in economic activity.
This approach is intuitive and simple, but it may overfit the data and provide false signals.
3.Checklist approach: Forecasters assess a wide range of economic data and extrapolate them into forecasts using objective statistical methods or subjective judgment.
This approach is flexible and allows for the incorporation of structural changes easily. However, it is subjective, time-consuming, and lacks consistency across different analyses.
Overall, each approach has its strengths and weaknesses, and a comprehensive analysis may incorporate elements from all three approaches.
29 Jun 2023 - by toptradeready.com