Dynamic Factor Models and Forecasting Finnish Macroeconomic Variables

In recent years, thanks to developments in information technology, large-dimensional datasets have been increasingly available. Researchers now have access to thousands of economic series and the information contained in them can be used to create accurate forecasts and to test economic theories. To exploit this large amount of information, researchers and policymakers need an appropriate econometric model.Usual time series models, vector autoregression for example, cannot incorporate more than a few variables. There are two ways to solve this problem: use variable selection procedures or gather the information contained in the series to create an index model. This thesis focuses on one of the most widespread index model, the dynamic factor model (the theory behind this model, based on previous literature, is the core of the first part of this study), and its use in forecasting Finnish macroeconomic indicators (which is the focus of the second part of the thesis). In particular, I forecast economic activity indicators (e.g. GDP) and price indicators (e.g. consumer price index), from 3 large Finnish datasets. The first dataset contains a large series of aggregated data obtained from the Statistics Finland database. The second dataset is composed by economic indicators from Bank of Finland. The last dataset is formed by disaggregated data from Statistic Finland, which I call micro dataset. The forecasts are computed following a two steps procedure: in the first step I estimate a set of common factors from the original dataset. The second step consists in formulating forecasting equations including the factors extracted previously. The predictions are evaluated using relative mean squared forecast error, where the benchmark model is a univariate autoregressive model. The results are dataset-dependent. The forecasts based on factor models are very accurate for the first dataset (the Statistics Finland one), while they are considerably worse for the Bank of Finland dataset. The forecasts derived from the micro dataset are still good, but less accurate than the ones obtained in the first case. This work leads to multiple research developments. The results here obtained can be replicated for longer datasets. The non-aggregated data can be represented in an even more disaggregated form (firm level). Finally, the use of the micro data, one of the major contributions of this thesis, can be useful in the imputation of missing values and the creation of flash estimates of macroeconomic indicator (nowcasting).

Forecasting rain for groundnut farmers�how good is good enough

: We illustrate how climatological information about adverse weather events and meteorological forecasts (when available) can be used to decide between alternative strategies so as to maximize the long-term average returns for rainfed groundnut in semi-arid parts of Karnataka, We show that until the skill of the forecast, i.e. probability of an adverse event occurring when it is forecast, is above a certain threshold, the forecast has no impact on the optimum strategy, This threshold is determined by the loss in yield due to the adverse weather event and the cost of the mitigatory measures, For the specific case of groundnut, it is found that while for combating some pests/diseases, climatological information is adequate, for others a forecast of sufficient skill would have a significant impact on the productivity.

Extended Muskingum method for flood routing

Routing of floods is essential to control the flood flow at the flood control station such that it is within the specified safe limit. In this paper, the applicability of the extended Muskingum method is examined for routing of floods for a case study of Hirakud reservoir, Mahanadi river basin, India. The inflows to the flood control station are of two types-one controllable which comprises of reservoir releases for power and spill and the other is uncontrollable which comprises of inflow from lower tributaries and intermediate catchment between the reservoir and the flood control station. Muskingum model is improved to incorporate multiple sources of inflows and single outflow to route the flood in the reach. Instead of time lag and prismoidal flow parameters, suitable coefficients for various types of inflows were derived using Linear Programming. Presently, the decisions about operation of gates of Hirakud dam are being taken once in 12 h during floods. However, four time intervals of 24, 18, 12 and 6 h are examined to test the sensitivity of the routing time interval on the computed flood flow at the flood control station. It is observed that mean relative error decreases with decrease in routing interval both for calibration and testing phase. It is concluded that the extended Muskingum method can be explored for similar reservoir configurations such as Hirakud reservoir with suitable modifications. (C) 2010 International Association of Hydro-environment Engineering and Research. Asia Pacific Division. Published by Elsevier By. All rights reserved.

Regional Flood Frequency Analysis using Two-level Clustering Approach

Clustering techniques are used in regional flood frequency analysis (RFFA) to partition watersheds into natural groups or regions with similar hydrologic responses. The linear Kohonen's self‐organizing feature map (SOFM) has been applied as a clustering technique for RFFA in several recent studies. However, it is seldom possible to interpret clusters from the output of an SOFM, irrespective of its size and dimensionality. In this study, we demonstrate that SOFMs may, however, serve as a useful precursor to clustering algorithms. We present a two‐level. SOFM‐based clustering approach to form regions for FFA. In the first level, the SOFM is used to form a two‐dimensional feature map. In the second level, the output nodes of SOFM are clustered using Fuzzy c‐means algorithm to form regions. The optimal number of regions is based on fuzzy cluster validation measures. Effectiveness of the proposed approach in forming homogeneous regions for FFA is illustrated through application to data from watersheds in Indiana, USA. Results show that the performance of the proposed approach to form regions is better than that based on classical SOFM.