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FI4003 Empirical Methods in Finance
Assignment: Inflation forecasting
where πt 12 +12 = ln CP It+12 − ln CP It is the inflation rate over the period t to t + 12, πt = 12 · (ln CP It − ln CP It−1) is the annualized inflation rate in period t, and β(L) = (β0 +β1L+β2L 2 +. . .) is the lag polynomial. The error term εt+12 is assumed to be white noise.
The second method assumes that year-on-year inflation follows a random walk. It therefore uses πt 12, the year-on-year inflation rate in period t, to forecast the inflation rate over the next twelve months, πt 12 +12.
Task and coverage: The data set series-180924.xls contains the UK monthly CPI for the period 1988m1-2024m08.2 The assignment requires you to write a report examining which of the two methods is better suited to forecast the UK inflation. You should therefore analyze the time-series properties of the year-on-year inflation rate, implement the regression and constant only forecasts, and produce inflation rate forecasts for each month in the period 2023m9-2024m8, i.e. the last 12 months of the sample.
General instructions
Your report should have a maximum of 1,500 words, the table of contents and the references do not count towards this word limit. 1,500 words correspond approximately to for to five normally spaced pages in a Word document with the font Times Roman at 12pts. References should be in the Harvard style.
The assignment carries 20% of the total marks in FI4003 Empirical Methods in Finance. The report will be assessed according to the Common Grading Scale (CGS). The Feedback Sheet provides further details on the marking grid.
The paper has to be submitted by 12:00noon on Thursday 7 November, 2024. Late submissions will be penalised in accordance with the regulations given in the relevant Business School Policy.
One electronic copy of the coursework has to be submitted to SafeAssign through MyAberdeen.
References
Meyer, B. H. and Passaogullari, M.: 2010, Simple Ways to Forecast Inflation: What Works Best?, Economic Commentary, 2010-17, Federal Re serve Bank of Cleveland.
Stock, J. H. and Watson, M. W.: 1999, Forecasting Inflation, Journal of Monetary Economics, 44, pp. 293-335.