This paper uses a new textual data index for predicting stock market data. The index is applied to a large set of news to evaluate the importance of one or more general economic-related keywords appearing in the text. The index assesses the importance of the economic-related keywords, based on their frequency of use and semantic network position. We apply it to the Italian press and construct indices to predict Italian stock and bond market returns and volatilities in a recent sample period, including the COVID-19 crisis. The evidence shows that the index captures the different phases of financial time series well. Moreover, results indicate strong evidence of predictability for bond market data, both returns and volatilities, short and long maturities, and stock market volatility.
Gianfreda, Angelica; Ravazzolo, Francesco & Rossini, Luca (2022)
Large Time-Varying Volatility Models for Hourly Electricity Prices*
We study the importance of time-varying volatility in modelling hourly electricity prices when fundamental drivers are included in the estimation. This allows us to contribute to the literature of large Bayesian VARs by using well-known time series models in a large dimension for the matrix of coefficients. Based on novel Bayesian techniques, we exploit the importance of both Gaussian and non-Gaussian error terms in stochastic volatility. We find that using regressors as fuel prices, forecasted demand and forecasted renewable energy is essential to properly capture the volatility of these prices. Moreover, we show that the time-varying volatility models outperform the constant volatility models in both the in-sample model-fit and the out-of-sample forecasting performance.
Avesani, Diego; Zanfei, Ariele, Di Marco, Nicola, Galletti, Andrea, Ravazzolo, Francesco, Righetti, Maurizio & Majone, Bruno (2022)
Short-term hydropower optimization driven by innovative time-adapting econometric model
The ongoing transformation of the electricity market has reshaped the hydropower production paradigm for storage reservoir systems, with a shift from strategies oriented towards maximizing regional energy production to strategies aimed at the revenue maximization of individual systems. Indeed, hydropower producers bid their energy production scheduling 1 day in advance, attempting to align the operational plan with hours where the expected electricity prices are higher. As a result, the accuracy of 1-day ahead prices forecasts has started to play a key role in the short-term optimization of storage reservoir systems. This paper aims to contribute to the topic by presenting a comparative assessment of revenues provided by short-term optimizations driven by two econometric models. Both models are autoregressive time-adapting hourly forecasting models, which exploit the information provided by past values of electricity prices, with one model, referred to as Autoarimax, additionally considering exogenous variables related to electricity demand and production. The benefit of using the innovative Autoarimax model is exemplified in two selected hydropower systems with different storage capacities. The enhanced accuracy of electricity prices forecasting is not constant across the year due to the large uncertainties characterizing the electricity market. Our results also show that the adoption of Autoarimax leads to larger revenues with respect to the use of a standard model, increases that depend strongly on the hydropower system characteristics. Our results may be beneficial for hydropower companies to enhance the expected revenues from storage hydropower systems, especially those characterized by large storage capacity.
Durante, Fabrizio; Gianfreda, Angelica, Ravazzolo, Francesco & Rossini, Luca (2022)
A multivariate dependence analysis for electricity prices, demand and renewable energy sources
This paper examines the dependence between electricity prices, demand, and renewable energy sources by means of a multivariate copula model while studying Germany, the widest studied market in Europe. The inter-dependencies are investigated in-depth and monitored over time, with particular emphasis on the tail behavior. To this end, suitable tail dependence measures are introduced to take into account a multivariate extreme scenario appropriately identified through the Kendall’s distribution function. The empirical evidence demonstrates a strong association between electricity prices, renewable energy sources, and demand within a day and over the studied years. Hence, this analysis provides guidance for further and different incentives for promoting green energy generation while considering the time-varying dependencies of the involved variables.
Billé, Anna Gloria; Gianfreda, Angelica, Del Grosso, Filippo & Ravazzolo, Francesco (2022)
Forecasting electricity prices with expert, linear, and nonlinear models
This paper compares several models for forecasting regional hourly day-ahead electricity prices, while accounting for fundamental drivers. Forecasts of demand, in-feed from renewable energy sources, fossil fuel prices, and physical flows are all included in linear and nonlinear specifications, ranging in the class of ARFIMA-GARCH models—hence including parsimonious autoregressive specifications (known as expert-type models). The results support the adoption of a simple structure that is able to adapt to market conditions. Indeed, we include forecasted demand, wind and solar power, actual generation from hydro, biomass, and waste, weighted imports, and traditional fossil fuels. The inclusion of these exogenous regressors, in both the conditional mean and variance equations, outperforms in point and, especially, in density forecasting when the superior set of models is considered. Indeed, using the model confidence set and considering northern Italian prices, predictions indicate the strong predictive power of regressors, in particular in an expert model augmented for GARCH-type time-varying volatility. Finally, we find that using professional and more timely predictions of consumption and renewable energy sources improves the forecast accuracy of electricity prices more than using predictions publicly available to researchers.
Iacopini, Matteo; Ravazzolo, Francesco & Rossini, Luca (2022)
Proper Scoring Rules for Evaluating Density Forecasts with Asymmetric Loss Functions
This article proposes a novel asymmetric continuous probabilistic score (ACPS) for evaluating and comparing density forecasts. It generalizes the proposed score and defines a weighted version, which emphasizes regions of interest, such as the tails or the center of a variable’s range. The (weighted) ACPS extends the symmetric (weighted) CRPS by allowing for asymmetries in the preferences underlying the scoring rule. A test is used to statistically compare the predictive ability of different forecasts. The ACPS is of general use in any situation where the decision-maker has asymmetric preferences in the evaluation of the forecasts. In an artificial experiment, the implications of varying the level of asymmetry in the ACPS are illustrated. Then, the proposed score and test are applied to assess and compare density forecasts of macroeconomic relevant datasets (U.S. employment growth) and of commodity prices (oil and electricity prices) with particular focus on the recent COVID-19 crisis period.
Ferrari, Davide; Ravazzolo, Francesco & Vespignani, Joaquin (2021)
Forecasting energy commodity prices: A large global dataset sparse approach
This paper focuses on forecasting quarterly nominal global energy prices of commodities, such as oil, gas and coal,using the Global VAR dataset proposed by Mohaddes and Raissi (2018). This dataset includes a number of poten-tially informative quarterly macroeconomic variables for the 33 largest economies, overall accounting for morethan 80% of the global GDP. To deal with the information on this large database, we apply dynamic factor modelsbased on a penalized maximum likelihood approach that allows to shrink parameters to zero and to estimatesparse factor loadings. The estimated latent factors show considerable sparsity and heterogeneity in the selectedloadings across variables. When the model is extended to predict energy commodity prices up to four periodsahead, results indicate larger predictability relative to the benchmark random walk model for 1-quarter aheadfor all energy commodities and up to 4 quarters ahead for gas prices. Our model also provides superior forecaststhan machine learning techniques, such as elastic net, LASSO and random forest, applied to the same database.
Agudze, Komla M.; Billio, Monica, Casarin, Roberto & Ravazzolo, Francesco (2021)
Markov switching panel with endogenous synchronization effects
This paper introduces a new dynamic panel model with multi-layer network effects. Series-specific latent Markov chain processes drive the dynamics of the observable processes, and several types of interaction effects among the hidden chains allow for various degrees of endogenous synchronization of both latent and observable processes. The interaction is driven by a multi-layer network with exogenous and endogenous connectivity layers. We provide some theoretical properties of the model, develop a Bayesian inference framework and an efficient Markov Chain Monte Carlo algorithm for estimating parameters, latent states, and endogenous network layers. An application to the US-state coincident indicators shows that the synchronization in the US economy is generated by network effects among the states. The inclusion of a multi-layer network provides a new tool for measuring the effects of the public policies that impact the connectivity between the US states, such as mobility restrictions or job support schemes. The proposed new model and the related inference are general and may find application in a wide spectrum of datasets where the extraction of endogenous interaction effects is relevant and of interest.
Caporin, Massimiliano; Gupta, Rangan & Ravazzolo, Francesco (2021)
Contagion between real estate and financial markets: A Bayesian quantile-on-quantile approach
We study contagion between Real Estate Investment Trusts (REITs) and the equity market in the U.S. over four sub-samples covering January, 2003 to December, 2017, by using Bayesian nonparametric quantile-on-quantile (QQ) regressions with heteroskedasticity. We find that the spillovers from the REITs on to the equity market has varied over time and quantiles defining the states of these two markets across the four sub-samples, thus providing evidence of shift-contagion. Further, contagion from REITs upon the stock market went up during the global financial crisis particularly, and also over the period corresponding to the European sovereign debt crisis, relative to the pre-crisis period. Our main findings are robust to alternative model specifications of the benchmark Bayesian QQ model, especially when we control for omitted variable bias using the heteroskedastic error structure. Our results have important implications for various agents in the economy namely, academics, investors and policymakers.
Ravazzolo, Francesco & Vespignani, Joaquin (2020)
World steel production: A new monthly indicator of global real economic activity
We compare alternative univariate versus multivariate models and frequentist versus Bayesian autoregressive and vector autoregressive specifications for hourly day-ahead electricity prices, both with and without renewable energy sources. The accuracy of point and density forecasts is inspected in four main European markets (Germany, Denmark, Italy, and Spain) characterized by different levels of renewable energy power generation. Our results show that the Bayesian vector autoregressive specifications with exogenous variables dominate other multivariate and univariate specifications in terms of both point forecasting and density forecasting.
Caporin, Massimiliano; Natvik, Gisle James, Ravazzolo, Francesco & Santucci de Magistris, Paolo (2019)
The bank-sovereign nexus: Evidence from a non-bailout episode
We explore the interplay between sovereign and bank credit risk in a setting where Danish authorities first let two Danish banks default and then left the country’s largest bank, Danske Bank, to recapitalize privately. We find that the correlation between bank and sovereign credit default swap (CDS) rates changed with these events. Following the non-bailout events, the sensitivity to external shocks, proxied by CDS rates on the European banking sector, declined both for Danske Bank and for Danish sovereign debt. After Danske Bank’s recapitalization, its exposure to the European banking sector reappeared while that did not happen for Danish sovereign debt. The decoupling between CDS rates on sovereign and private bank debt indicates that the vicious feedback loop between bank and sovereign risk weakened after the non-bailout policies were introduced.
Furlanetto, Francesco; Ravazzolo, Francesco & Sarferaz, Samad (2019)
Identification of financial factors in economic fluctuations
We estimate demand, supply, monetary, investment and financial shocks in a VAR identified with a minimum set of sign restrictions on US data. We find that financial shocks are major drivers of fluctuations in output, stock prices and investment but have a limited effect on inflation. In a second step, we disentangle shocks originating in the housing sector, shocks originating in credit markets and uncertainty shocks. In the extended set‐up, financial shocks are even more important and a leading role is played by housing shocks that have large and persistent effects on output.
Catania, Leopoldo; Grassi, Stefano & Ravazzolo, Francesco (2019)
Forecasting cryptocurrencies under model and parameter instability
This paper studies the predictability of cryptocurrency time series. We compare several alternative univariate and multivariate models for point and density forecasting of four of the most capitalized series: Bitcoin, Litecoin, Ripple and Ethereum. We apply a set of crypto-predictors and rely on dynamic model averaging to combine a large set of univariate dynamic linear models and several multivariate vector autoregressive models with different forms of time variation. We find statistically significant improvements in point forecasting when using combinations of univariate models, and in density forecasting when relying on the selection of multivariate models. Both schemes deliver sizable directional predictability.
Bassetti, Federico; Casarin, Roberto & Ravazzolo, Francesco (2018)
Bayesian Nonparametric Calibration and Combination of Predictive Distributions
In public discussions of the quality of forecasts, attention typically focuses on the predictive performance in cases of extreme events. However, the restriction of conventional forecast evaluation methods to subsets of extreme observations has unexpected and undesired effects, and is bound to discredit skillful forecasts when the signal-to-noise ratio in the data generating process is low. Conditioning on outcomes is incompatible with the theoretical assumptions of established forecast evaluation methods, thereby confronting forecasters with what we refer to as the forecaster’s dilemma. For probabilistic forecasts, proper weighted scoring rules have been proposed as decision-theoretically justifiable alternatives for forecast evaluation with an emphasis on extreme events. Using theoretical arguments, simulation experiments and a real data study on probabilistic forecasts of U.S. inflation and gross domestic product (GDP) growth, we illustrate and discuss the forecaster’s dilemma along with potential remedies.
Bjørnland, Hilde C; Ravazzolo, Francesco & Thorsrud, Leif Anders (2017)
Forecasting GDP with global components: This time is different