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Addressing Concerns about Single Path Analysis in Business Cycle Turning Points: The Case of Learning Vector Quantization

Author

Listed:
  • David Enck

    (Department of Industrial Manufacturing & Systems Engineering, Texas Tech University, Lubbock, TX 79409, USA)

  • Mario Beruvides

    (Department of Industrial Manufacturing & Systems Engineering, Texas Tech University, Lubbock, TX 79409, USA)

  • Víctor G. Tercero-Gómez

    (School of Engineering and Sciences, Tecnologico de Monterrey, Monterrey 64849, Mexico)

  • Alvaro E. Cordero-Franco

    (Facultad de Ciencias Físico Matemáticas, Universidad Autónoma de Nuevo León, San Nicolás de los Garza 66451, Mexico)

Abstract

Data-driven approaches in machine learning are increasingly applied in economic analysis, particularly for identifying business cycle (BC) turning points. However, temporal dependence in BCs is often overlooked, leading to what we term single path analysis (SPA). SPA neglects the diverse potential routes of a temporal data structure. It hinders the evaluation and calibration of algorithms. This study emphasizes the significance of acknowledging temporal dependence in BC analysis and illustrates the problem of SPA using learning vector quantization (LVQ) as a case study. LVQ was previously adapted to use economic indicators to determine the current BC phase, exhibiting flexibility in adapting to evolving patterns. To address temporal complexities, we employed a multivariate Monte Carlo simulation incorporating a specified number of change-points, autocorrelation, and cross-correlations, from a second-order vector autoregressive model. Calibrated with varying levels of observed economic leading indicators, our approach offers a deeper understanding of LVQ’s uncertainties. Our results demonstrate the inadequacy of SPA, unveiling diverse risks and worst-case protection strategies. By encouraging researchers to consider temporal dependence, this study contributes to enhancing the robustness of data-driven approaches in financial and economic analyses, offering a comprehensive framework for addressing SPA concerns.

Suggested Citation

  • David Enck & Mario Beruvides & Víctor G. Tercero-Gómez & Alvaro E. Cordero-Franco, 2024. "Addressing Concerns about Single Path Analysis in Business Cycle Turning Points: The Case of Learning Vector Quantization," Mathematics, MDPI, vol. 12(5), pages 1-15, February.
    • Handle: RePEc:gam:jmathe:v:12:y:2024:i:5:p:678-:d:1345959
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    References listed on IDEAS

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