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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
Financial Nowcasts and Their Usefulness in Macroeconomic Forecasting
Edward S. Knotek
Saeed Zaman
Abstract

Financial data often contain information that is helpful for macroeconomic forecasting, while multistep forecast accuracy also benefits by incorporating good nowcasts of macroeconomic variables. This paper considers the role of nowcasts of financial variables in making conditional forecasts of real and nominal macroeconomic variables using standard quarterly Bayesian vector autoregressions (BVARs). For nowcasting the quarterly value of a variety of financial variables, we document that the average of the available daily data and a daily random walk forecast to fill in the missing days in the quarter typically outperforms other nowcasting approaches. Using real-time data and out-of-sample forecasting exercises, we find that the inclusion of financial variable nowcasts by themselves generally improves forecast accuracy for macroeconomic variables relative to unconditional forecasts, although we document several exceptions in which current-quarter forecast accuracy worsens with the inclusion of the financial nowcasts. Incorporating financial nowcasts and nowcasts of macroeconomic variables generally improves the forecast accuracy for all the macroeconomic indicators of interest, beyond including the nowcasts of the macroeconomic variables alone. Conditional forecasts generated from quarterly BVARs augmented with nowcasts of key financial variables rival the forecast accuracy of mixed-frequency dynamic factor models (MF-DFMs) and mixed-data sampling (MIDAS) models that explicitly link the quarterly data and forecasts to high-frequency financial data.


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Edward S. Knotek & Saeed Zaman, Financial Nowcasts and Their Usefulness in Macroeconomic Forecasting, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 1702, 17 Mar 2017.
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Keywords: conditional forecasting; nowcasting; vector autoregressions; mixed-frequency models; Bayesian methods
DOI: 10.26509/frbc-wp-201702
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