Aakash Mankodi and Tim Pike
Tetlock and Gardner’s acclaimed work on Superforecasting provides a compelling case for seeing forecasting as a skill that can be improved, and one that is related to the behavioural traits of the forecaster. These so-called Superforecasters have in recent years been pitted against experts ranging from U.S intelligence analysts to participants in the World Economic Forum, and have performed on par or better by accurately predicting the outcomes of a broad range of questions. Sounds like music to a central banker’s ears? In this post, we examine the traits of these individuals, compare them with economic forecasting and draw some related lessons. We conclude that considering the principles and applications of Superforecasting can enhance the work of central bank forecasting.
Continue reading “Can central bankers become Superforecasters?”
Dan Georgescu and Nicholas J. Higham
Correlation matrices arise in many applications to model the dependence between variables. Where there is incomplete or missing information for the variables, this may lead to missing values in the correlation matrix itself, and the problem of how to complete the matrix. We show that some of these practical problems can be solved explicitly, via simple formulae, and we explain how to use mathematical tools to solve the more general problem where explicit solutions may not exist. “Simple” is, of course, a relative term, and the underlying matrix algebra and optimization necessarily makes this article more mathematically sophisticated than the typical Bank Underground post.
Continue reading “Completing Correlation Matrices”
Jeremy Franklin, Scott Woldum, Oliver Wood and Alex Parsons
How do markets react to the release of economic data? We use a set of machine learning and statistical algorithms to try to find out. In the period since the EU referendum, we find that UK data outturns have generally been more positive than market expectations immediately prior to their release. At the same time, the responsiveness of market interest rates to those data surprises fell below historic averages. The sensitivity of market rates has also been below historic averages in the US and Euro area, suggesting international factors may also have played a role. But there are some signs that the sensitivity has increased over the past year in the UK.
Continue reading “Stirred, not shaken: how market interest rates have been reacting to economic data surprises”
Smartphone apps and newsfeeds are designed to constantly grab our attention. And research suggests we’re distracted nearly 50% of the time. Could this be weighing down on productivity? And why is the crisis of attention particularly concerning in the context of the rise of AI and the need, therefore, to cultivate distinctively human qualities?
Continue reading “Is the economy suffering from the crisis of attention?”
Aidan Saggers and Chiranjit Chakraborty
Investment in the Financial Technology (FinTech) industry has increased rapidly post crisis and globalisation is apparent with many investors funding companies far from their own physical locations. From Crunchbase data we gathered all the venture capital investments in FinTech start-up firms from 2010 to 2014 and created network diagrams for each year.
Continue reading “Bitesize: Flourishing FinTech”
Chiranjit Chakraborty and Andreas Joseph
Rapid advances in analytical modelling and information processing capabilities, particularly in machine learning (ML) and artificial intelligence (AI), combined with ever more granular data are currently transforming many aspects of everyday life and work. In this blog post we give a brief overview of basic concepts of ML and potential applications at central banks based on our research. We demonstrate how an artificial neural network (NN) can be used for inflation forecasting which lies at the heart of modern central banking. We show how its structure can help to understand model reactions. The NN generally outperforms more conventional models. However, it struggles to cope with the unseen post-crises situation which highlights the care needed when considering new modelling approaches.
Continue reading “New machines for The Old Lady”
Ambrogio Cesa-Bianchi , Chris Redl, Andrej Sokol and Gregory Thwaites
Volatile economic data or political events can lead to heightened uncertainty. This can then weigh on households’ and firms’ spending and investment decisions. We revisit the question of how uncertainty affects the UK economy, by constructing new measures of uncertainty and quantifying their effects on economic activity. We find that UK uncertainty depresses domestic activity only insofar as it is driven by developments overseas, and that other changes in uncertainty about the UK real economy have very little effect.
Continue reading “Does domestic uncertainty really matter for the economy?”
Marco Bardoscia, Paolo Barucca, Adam Brinley Codd and John Hill
The failure of Lehman Brothers on 15 September 2008 sent shockwaves around the world. But the losses at Lehman Brothers were only the start of the problem. The price of their bonds halved, almost overnight. Other institutions that held Lehman’s debt faced huge losses, and markets feared that those losses could trigger further failures. The good news is that our latest research suggests that risks within the UK banking system from one such contagion channel, “solvency contagion”, have declined sharply since 2008. We have developed a new model which quantifies risk from this channel, and helps us understand why it has fallen. Regulators are using the model to monitor this particular source of risk as part of the Bank’s annual concurrent stress test exercise.
Continue reading “The decline of solvency contagion risk”
Alex Haberis, Richard Harrison and Matt Waldron.
In textbook models of monetary policy, a promise to hold interest rates lower in the future has very powerful effects on economic activity and inflation today. This result relies on: a) a strong link between expected future policy rates and current activity; b) a belief that the policymaker will make good on the promise. We draw on analysis from our Staff Working Paper and show that there is a tension between (a) and (b) that creates a paradox: the stronger the expectations channel, the less likely it is that people will believe the promise in the first place. As a result, forward guidance promises in these models are much less powerful than standard analysis suggests.
Continue reading “The Forward Guidance Paradox”