Discussion Papers

The ICMA Centre is dedicated to high quality academic research in all financial markets, broadly defined. Well over 100 discussion papers are available to download (see menu on left). 

2014 Series

All discussion papers are downloadable on the SSRN website.

Do US Macroeconomic Forecasters Exaggerate Their Differences?

Reference: 2014-10
Authors: Michael P. Clements, ICMA Centre, Henley Business School

Application of the Bernhardt, Campello and Kutsoati (2006) test of herding to the calendar-year annual output growth and inflation forecasts suggests forecasters tend to exaggerate their differences, except at the shortest horizon when they tend to herd. We consider whether these types of behaviour can help to explain the puzzle that professional forecasters sometimes make point predictions and histogram forecastsContinue reading


Commodity Risk Factors and the Cross-Section of Equity Returns

Reference: 2014-9
Authors: Chris Brooks, ICMA Centre; Adrian Fernandez-Perez, Auckland University of Technology, Auckland, NZ; Jo√ęlle Miffre EDHEC Business School, France; Ogonna Nneji, ICMA Centre

The article examines whether commodity risk is priced in the cross-section of equity returns. Alongside a long-only equally-weighted portfolio of commodity futures, we employ as an alternative commodity risk factor a term structure portfolio that captures the propensity of commodity futures markets to be backwardated or contangoed. Equity-sorted portfolios with greater sensitivities to the two commodity risk factors command higherContinue reading


Monte Carlo Approximate Tensor Moment Simulations

Reference: 2014-8
Authors: Juan C. Arismendi, ICMA Centre, University of Reading and University of Brasilia and Herbert Kimura, University of Brasilia

An algorithm to generate samples with approximate first-, second-, and third-order moments is presented extending the Cholesky matrix decomposition to a Cholesky tensor decomposition of an arbitrary order. The tensor decomposition of the first-, second-, and third-order objective moments generates a non-linear system of equations. The algorithm solves these equations by numerical methods. The results show that the optimisation algorithm delivers samples with an approximate errorContinue reading


An Analytic Approximation of the Implied Risk-Neutral Density of American Multi-Asset Options

Reference: 2014-7
Authors: Juan C. Arismendi, ICMA Centre and Universidade de Brasília (UnB) and Marcel Prokopczuk, Zeppelin University and ICMA Centre

The price of a European option can be computed as the expected value of the payoff function under the risk-neutral measure. For American options and path-dependent options in general, this principle can not be applied. In this paper, we derive a model-free analytical formula for the implied risk-neutral density under which the expected value will be the price of theContinue reading


Anticipating Early Data Revisions to US GDP and the Effects of Releases on Equity Markets

Reference: 2014-6
Authors: Michael P. Clements and Ana Beatriz GalvaŐÉo

The effects of data uncertainty on real-time decision-making can be reduced by predicting early revisions to US GDP growth. We show that survey forecasts efficiently anticipate the first-revised estimate of GDP, but that forecasting models incorporating monthly economic indicators and daily equity returns provide superior forecasts of the second-revised estimate. We consider the implications of these findings for analyses ofContinue reading


Real-Time Factor Model Forecasting and the Effects of Instability

Reference: 2014-5
Authors: Michael P. Clements

We show that factor forecasting models deliver real-time gains over autoregressive models for US real activity variables during the recent period, but are less successful for nominal variables. The gains are largely due to the Financial Crisis period, and are primarily at the shortest (one quarter ahead) horizon. Excluding the pre-Great Moderation years from the factor forecasting model estimation periodContinue reading


Measuring Macroeconomic Uncertainty: US Inflation and Output Growth

Reference: 2014-4
Authors: Michael P Clements and Ana Beatriz Galv√£o

We find that model estimates of the term structure of ex ante or perceived macro uncertainty are more in line with realized uncertainty than survey respondents’ perceptions for both inflation and output growth. Survey estimates contain short-term vari- ation in short-horizon uncertainty which is less evident in the model-based estimates. We consider the extent to which these short-term variations coincideContinue reading


A Multi-Asset Option Approximation for General Stochastic Processes

Reference: 2014-3
Authors: Juan C Arismendi

We derived a model-free analytical approximation of the price of a multi-asset option defined over an arbitrary multivariate process, applying a semi-parametric expansion of the unknown risk-neutral density with the moments. The analytical expansion termed as the Multivariate Generalised Edgeworth Expansion (MGEE) is an infinite series over the derivatives of the known continuous time density. The expected value of the density expansion is calculated to approximateContinue reading


Long-Run Restrictions and Survey Forecasts of Output, Consumption and Investment

Reference: 2014-2
Authors: Michael P Clements

We consider whether imposing long-run restrictions on survey respondents’ long-horizon forecasts will enhance their accuracy. The restrictions are motivated by the belief that the macro-variables consumption, investment and output move together in the long run, and that this should be evident in long-horizon forecasts. The restrictions are imposed by exponential-tilting of simple auxiliary forecast densities. We find a modest overallContinue reading


Did Purchasing Power Parity Hold in Medieval Europe?

Reference: 2014-1
Authors: Adrian R. Bell, Chris Brooks and Tony K Moore

This paper employs a unique, hand-collected dataset of exchange rates for five major currencies (the lira of Barcelona, the pound sterling of England, the pond groot of Flanders, the florin of Florence and the livre tournois of France) to consider whether the law of one price and purchasing power parity held in Europe during the late fourteenth and early fifteenth centuries. Using single seriesContinue reading