Novel econometric models to manage financial crises

Europe's debt crisis highlighted the need to step up efforts in monitoring economic conditions and forecasting market trends. An EU initiative developed tools to aid in the identification, prediction and regulation of European financial markets and economies.

To forecast future developments in the economy, models based on methods such as multiscale spectral analysis (MSA) offer much potential. With this in mind, the EU-funded ASPECT (Advanced spectral techniques in econometric modelling of macro-financial linkages in the euro area) project developed new forecasting models to shed light on the euro area's macroeconomic and financial issues.

Project partners exploited several cutting-edge econometric techniques employed in identifying multifaceted dynamics of global markets, especially the euro area. Findings were used to examine the effect of long and short-term shocks to EU and global economies. They also looked into the probability of markets through MSA and dynamic stochastic general equilibrium (DSGE) modelling, another forecasting model.

The team measured national and global mutual reliance on fluctuations in economic activity that an economy experiences between periods of growth or recession in the euro area. It also developed new DSGE and time-varying econometric models and assessed the predictability of DSGE models against established statistical tools in use until today.

To forecast economic and financial markets, ASPECT developed novel multiscale decomposition methods. It also created a spectral timescale non-linear causality testing approach and studied the contagion, decoupling and spillover effects of the American financial crisis on the euro area, Asia, Brazil, China, India, Russia and South Africa.

Researchers uncovered new findings concerning asset forecastability and heterogeneous behaviour in financial markets. In an effort to explain inefficiency and market volatility, they investigated how information is disseminated in global markets. Partners also showed that market interdependencies could be key to optimal asset allocation and portfolio diversification.

ASPECT exploited the field of economics to propose innovative modelling methods. By doing so, it will provide new directions for policymaking and crisis management in the post-financial crisis era.

last modification: 2016-02-23

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