IDEAS home Printed from https://ideas.repec.org/p/pre/wpaper/202111.html
   My bibliography  Save this paper

Uncertainty and Forecastability of Regional Output Growth in the United Kingdom: Evidence from Machine Learning

Author

Listed:
  • Mehmet Balcilar

    (Eastern Mediterranean University, Famagusta, via Mersin 10, Northern Cyprus, Turkey)

  • David Gabauer

    (Data Analysis Systems, Software Competence Center Hagenberg, Austria)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa)

  • Christian Pierdzioch

    (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany)

Abstract

Utilizing a machine-learning technique known as random forests, we study whether regional output growth uncertainty helps to improve the accuracy of forecasts of regional output growth for twelve regions of the United Kingdom using monthly data for the period from 1970 to 2020. We use a stochastic-volatility model to measure regional output growth uncertainty. We document the importance of interregional stochastic volatility spillovers and the direction of the transmission mechanism. Given this, our empirical results shed light on the contribution to forecast performance of own uncertainty associated with a particular region, output growth uncertainty of other regions, and output growth uncertainty as measured for London as well. We find that output growth uncertainty significantly improves forecast performance in several cases, where we also document cross-regional heterogeneity in this regard.

Suggested Citation

  • Mehmet Balcilar & David Gabauer & Rangan Gupta & Christian Pierdzioch, 2021. "Uncertainty and Forecastability of Regional Output Growth in the United Kingdom: Evidence from Machine Learning," Working Papers 202111, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202111
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    References listed on IDEAS

    as
    1. Kastner, Gregor & Frühwirth-Schnatter, Sylvia, 2014. "Ancillarity-sufficiency interweaving strategy (ASIS) for boosting MCMC estimation of stochastic volatility models," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 408-423.
    2. Duprey, Thibaut & Klaus, Benjamin & Peltonen, Tuomas, 2017. "Dating systemic financial stress episodes in the EU countries," Journal of Financial Stability, Elsevier, vol. 32(C), pages 30-56.
    3. Caggiano, Giovanni & Castelnuovo, Efrem & Pellegrino, Giovanni, 2021. "Uncertainty shocks and the great recession: Nonlinearities matter," Economics Letters, Elsevier, vol. 198(C).
    4. Francis X. Diebold & Kamil Yilmaz, 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, Royal Economic Society, vol. 119(534), pages 158-171, January.
    5. Rangan Gupta & Chi Keung Marco Lau & Mark E. Wohar, 2019. "The impact of US uncertainty on the Euro area in good and bad times: evidence from a quantile structural vector autoregressive model," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(2), pages 353-368, May.
    6. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
    7. Matteo Barigozzi & Marc Hallin, 2016. "Generalized dynamic factor models and volatilities: recovering the market volatility shocks," Econometrics Journal, Royal Economic Society, vol. 19(1), pages 33-60, February.
    8. Antonakakis, Nikolaos & Gabauer, David & Gupta, Rangan & Plakandaras, Vasilios, 2018. "Dynamic connectedness of uncertainty across developed economies: A time-varying approach," Economics Letters, Elsevier, vol. 166(C), pages 63-75.
    9. Salvador Barrios & Marius Brülhart & Robert J.R. Elliott & Marianne Sensier, 2003. "A Tale of Two Cycles: Co‐Fluctuations Between UK Regions and the Euro Zone," Manchester School, University of Manchester, vol. 71(3), pages 265-292, June.
    10. Pierdzioch Christian & Gupta Rangan, 2020. "Uncertainty and Forecasts of U.S. Recessions," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(4), pages 1-20, September.
    11. Jing Cynthia Wu & Fan Dora Xia, 2016. "Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(2-3), pages 253-291, March.
    12. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    13. Junttila, Juha & Vataja, Juuso, 2018. "Economic policy uncertainty effects for forecasting future real economic activity," Economic Systems, Elsevier, vol. 42(4), pages 569-583.
    14. Al-Thaqeb, Saud Asaad & Algharabali, Barrak Ghanim, 2019. "Economic policy uncertainty: A literature review," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).
    15. Efrem Castelnuovo & Guay Lim & Giovanni Pellegrino, 2017. "A Short Review of the Recent Literature on Uncertainty," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 50(1), pages 68-78, March.
    16. John Y. Campbell, 2008. "Viewpoint: Estimating the equity premium," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 41(1), pages 1-21, February.
    17. Gupta, Rangan & Pierdzioch, Christian & Risse, Marian, 2016. "On international uncertainty links: BART-based empirical evidence for Canada," Economics Letters, Elsevier, vol. 143(C), pages 24-27.
    18. Gary Koop & Stuart McIntyre & James Mitchell, 2020. "UK regional nowcasting using a mixed frequency vector auto‐regressive model with entropic tilting," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 183(1), pages 91-119, January.
    19. Gupta, Rangan & Ma, Jun & Risse, Marian & Wohar, Mark E., 2018. "Common business cycles and volatilities in US states and MSAs: The role of economic uncertainty," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 317-337.
    20. John Y. Campbell, 2007. "Estimating the Equity Premium," NBER Working Papers 13423, National Bureau of Economic Research, Inc.
    21. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
    22. Caggiano, Giovanni & Castelnuovo, Efrem & Kima, Richard, 2020. "The global effects of Covid-19-induced uncertainty," Economics Letters, Elsevier, vol. 194(C).
    23. Balcilar, Mehmet & Gupta, Rangan & Segnon, Mawuli, 2016. "The role of economic policy uncertainty in predicting U.S. recessions: A mixed-frequency Markov-switching vector autoregressive approach," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-20.
    24. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    25. Lastrapes, William D. & Wiesen, Thomas F.P., 2021. "The joint spillover index," Economic Modelling, Elsevier, vol. 94(C), pages 681-691.
    26. Michael Beenstock & Daniel Felsenstein, 2008. "Regional Heterogeneity, Conditional Convergence and Regional Inequality," Regional Studies, Taylor & Francis Journals, vol. 42(4), pages 475-488.
    27. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
    28. Don Bredin & Stilianos Fountas & Christos Savva, 2021. "Is British output growth related to its uncertainty? Evidence using eight centuries of data," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(3), pages 345-364, July.
    29. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    30. Goodness C. Aye & Rangan Gupta & Chi Keung Marco Lau & Xin Sheng, 2019. "Is there a role for uncertainty in forecasting output growth in OECD countries? Evidence from a time-varying parameter-panel vector autoregressive model," Applied Economics, Taylor & Francis Journals, vol. 51(33), pages 3624-3631, July.
    31. Haroon Mumtaz & Laura Sunder‐Plassmann & Angeliki Theophilopoulou, 2018. "The State‐Level Impact of Uncertainty Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(8), pages 1879-1899, December.
    32. Nikolaos Antonakakis & Ioannis Chatziantoniou & David Gabauer, 2020. "Refined Measures of Dynamic Connectedness based on Time-Varying Parameter Vector Autoregressions," JRFM, MDPI, vol. 13(4), pages 1-23, April.
    33. Karnizova, Lilia & Li, Jiaxiong (Chris), 2014. "Economic policy uncertainty, financial markets and probability of US recessions," Economics Letters, Elsevier, vol. 125(2), pages 261-265.
    34. Gabauer, David & Gupta, Rangan, 2018. "On the transmission mechanism of country-specific and international economic uncertainty spillovers: Evidence from a TVP-VAR connectedness decomposition approach," Economics Letters, Elsevier, vol. 171(C), pages 63-71.
    35. Christina Christou & Giray Gozgor & Rangan Gupta & Chi keung Marco Lau, 2020. "Are Uncertainties across the World Convergent?," Economics Bulletin, AccessEcon, vol. 40(1), pages 855-862.
    36. Christou, Christina & Gabauer, David & Gupta, Rangan, 2020. "Time-Varying impact of uncertainty shocks on macroeconomic variables of the united kingdom: Evidence from over 150 years of monthly data," Finance Research Letters, Elsevier, vol. 37(C).
    37. Gary Koop & Stuart McIntyre & James Mitchell & Aubrey Poon, 2020. "Regional output growth in the United Kingdom: More timely and higher frequency estimates from 1970," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(2), pages 176-197, March.
    38. Mehmet Balcilar & Zeynel Abidin Ozdemir, 2020. "A re-examination of growth and growth uncertainty relationship in a stochastic volatility in the mean model with time-varying parameters," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(3), pages 611-641, August.
    39. Mumtaz, Haroon, 2018. "Does uncertainty affect real activity? Evidence from state-level data," Economics Letters, Elsevier, vol. 167(C), pages 127-130.
    40. Goodness C. Aye & Christina Christou & Luis A. Gil‐Alana & Rangan Gupta, 2019. "Forecasting the Probability of Recessions in South Africa: the Role of Decomposed Term Spread and Economic Policy Uncertainty," Journal of International Development, John Wiley & Sons, Ltd., vol. 31(1), pages 101-116, January.
    41. Gupta, Rangan & Pierdzioch, Christian & Salisu, Afees A., 2022. "Oil-price uncertainty and the U.K. unemployment rate: A forecasting experiment with random forests using 150 years of data," Resources Policy, Elsevier, vol. 77(C).
    42. repec:zbw:bofrdp:2020_011 is not listed on IDEAS
    43. Rangan Gupta & Godwin Olasehinde-Williams & Mark E. Wohar, 2018. "The Impact of US Uncertainty Shocks on a Panel of Advanced and Emerging Market Economies: The Role of Exchange Rate, Trade and Financial Channels," Working Papers 201857, University of Pretoria, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Salisu, Afees A. & Gupta, Rangan & Karmakar, Sayar & Das, Sonali, 2022. "Forecasting output growth of advanced economies over eight centuries: The role of gold market volatility as a proxy of global uncertainty," Resources Policy, Elsevier, vol. 75(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mehmet Balcilar & David Gabauer & Rangan Gupta & Christian Pierdzioch, 2022. "Uncertainty and forecastability of regional output growth in the UK: Evidence from machine learning," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(6), pages 1049-1064, September.
    2. Salisu, Afees A. & Gupta, Rangan & Karmakar, Sayar & Das, Sonali, 2022. "Forecasting output growth of advanced economies over eight centuries: The role of gold market volatility as a proxy of global uncertainty," Resources Policy, Elsevier, vol. 75(C).
    3. Gupta, Rangan & Pierdzioch, Christian & Salisu, Afees A., 2022. "Oil-price uncertainty and the U.K. unemployment rate: A forecasting experiment with random forests using 150 years of data," Resources Policy, Elsevier, vol. 77(C).
    4. Pierdzioch Christian & Gupta Rangan, 2020. "Uncertainty and Forecasts of U.S. Recessions," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(4), pages 1-20, September.
    5. Woraphon Yamaka & Rangan Gupta & Sukrit Thongkairat & Paravee Maneejuk, 2023. "Structural and predictive analyses with a mixed copula‐based vector autoregression model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(2), pages 223-239, March.
    6. Gupta, Rangan & Sun, Xiaojin, 2020. "Forecasting economic policy uncertainty of BRIC countries using Bayesian VARs," Economics Letters, Elsevier, vol. 186(C).
    7. Gabauer, David & Gupta, Rangan, 2020. "Spillovers across macroeconomic, financial and real estate uncertainties: A time-varying approach," Structural Change and Economic Dynamics, Elsevier, vol. 52(C), pages 167-173.
    8. Christina Christou & Giray Gozgor & Rangan Gupta & Chi keung Marco Lau, 2020. "Are Uncertainties across the World Convergent?," Economics Bulletin, AccessEcon, vol. 40(1), pages 855-862.
    9. Plakandaras, Vasilios & Gupta, Rangan & Balcilar, Mehmet & Ji, Qiang, 2022. "Evolving United States stock market volatility: The role of conventional and unconventional monetary policies," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    10. Mehmet Balcilar & David Gabauer & Rangan Gupta & Christian Pierdzioch, 2023. "Climate Risks and Forecasting Stock Market Returns in Advanced Economies over a Century," Mathematics, MDPI, vol. 11(9), pages 1-21, April.
    11. Cagli, Efe Caglar & Mandaci, Pinar Evrim, 2023. "Time and frequency connectedness of uncertainties in cryptocurrency, stock, currency, energy, and precious metals markets," Emerging Markets Review, Elsevier, vol. 55(C).
    12. Gupta, Rangan & Sheng, Xin & Balcilar, Mehmet & Ji, Qiang, 2021. "Time-varying impact of pandemics on global output growth," Finance Research Letters, Elsevier, vol. 41(C).
    13. Gupta, Rangan & Lau, Chi-Keung (Marco) & Sheng, Xin, 2020. "Graph theory-based network analysis of regional uncertainties of the US Economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 540(C).
    14. Rangan Gupta & Chi Keung Marco Lau & Mark E. Wohar, 2019. "The impact of US uncertainty on the Euro area in good and bad times: evidence from a quantile structural vector autoregressive model," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(2), pages 353-368, May.
    15. Aviral Kumar Tiwari & Micheal Kofi Boachie & Rangan Gupta, 2021. "Network Analysis of Economic and Financial Uncertainties in Advanced Economies: Evidence from Graph-Theory," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(1), pages 188-215, March.
    16. Antonakakis, Nikolaos & Gabauer, David & Gupta, Rangan, 2019. "Greek economic policy uncertainty: Does it matter for Europe? Evidence from a dynamic connectedness decomposition approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 535(C).
    17. Stenfors, Alexis & Chatziantoniou, Ioannis & Gabauer, David, 2022. "Independent policy, dependent outcomes: A game of cross-country dominoes across European yield curves," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    18. Christou, Christina & Gupta, Rangan, 2020. "Forecasting equity premium in a panel of OECD countries: The role of economic policy uncertainty," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 243-248.
    19. Luo, Keyu & Guo, Qiang & Li, Xiafei, 2022. "Can the return connectedness indices from grey energy to natural gas help to forecast the natural gas returns?," Energy Economics, Elsevier, vol. 109(C).
    20. Mawuli Segnon & Rangan Gupta & Stelios Bekiros & Mark E. Wohar, 2018. "Forecasting US GNP growth: The role of uncertainty," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 37(5), pages 541-559, August.

    More about this item

    Keywords

    Regional Output Growth; Uncertainty; United Kingdom; Forecasting; Machine Learning;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pre:wpaper:202111. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Rangan Gupta (email available below). General contact details of provider: https://edirc.repec.org/data/decupza.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.