Kiel Working Papers, Kiel Institute for World Economics
No 1487:
Modeling the Dynamics of EU Economic Sentiment Indicators: An Interaction-Based Approach
Jaba Ghonghadze and Thomas Lux
Abstract: This paper estimates a simple univariate model of
expectation or opinion formation in continuous time adapting a ‘canonical’
stochastic model of collective opinion dynamics (Weidlich and Haag, 1983;
Lux, 1995, 2007). This framework is applied to a selected data set on
survey-based expectations from the rich EU business and consumer survey
database for twelve European countries. The model parameters are estimated
through maximum likelihood and numerical solution of the transient
probability density functions for the resulting stochastic process. The
model's performance is assessed with respect to its out-of-sample
forecasting capacity relative to univariate time series models of the
ARMA(p; q) and ARFIMA(p; d; q) varieties. These tests speak for a slight
superiority of the canonical opinion dynamics model over the alternatives
in the majority of cases
Keywords: expectation formation, survey-based expectations, opinion dynamics, Fokker-Planck equation, forecasting; (follow links to similar papers)
JEL-Codes: E32,; C53; (follow links to similar papers)
39 pages, February 2009
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