What is Economic Performance? Different techniques if economic forecasting (Survey, Econometric Models, Economic Indicators, Diffusion and composition indices).

1. Presentation
Title: Economic Forecasting
Subject: Security Analysis and Portfolio Management
Presenter: Esmatullah Mohammady
UID: 17MBA1079
Content:
 What is Economic Forecasting
 Techniques of Economic Forecasting
Prepared By ------------------------------------------------ Esmatullah Mohammady (17MBA1079)

2. What is Economic Forecasting?
Economic forecasting is the process of attempting to predict the future condition of the economy
using a combination of important and widely-followed indicators
To estimate stock price changes, an analyst must look at the macroeconomic environment and the
factors peculiar to the industry he is concerned with.
Economic activities affect:
 Corporate Profit
 Investor attitudes
 Share Prices
Ex: A fall in the GDP or slow down in the economic growth may lead to fall in corporate profits and
consequently stock prices.
Prepared By ------------------------------------------------ Esmatullah Mohammady (17MBA1079)

3. Techniques of Economic Forecasting:
The common techniques used are:
1) Economic Indicators:
Economic indicators are variables that predicts the future of financial or economic trends. The
purpose of using indicators is to make an early diagnosis of cyclical movements.
Economic Indicators are of following types:
a) Leading Indicators: these are indicators that indicates what is going to happen in the economy.
Popular indicators are such as: Fiscal Policy, Monetary Policy, Productivity, Rainfall, capital
investment and stock indices.
b) Coincidental Indicators: These are the indicators that shows the current state of the economy
such as: GDP, Industrial Production, Interest Rates, Reserve Funds etc.
c) Lagging Indicators: The changes that occur in leading and coincidental indicators are reflected
in lagging indicators such as: Unemployment rate, Consumer Price Index and Flow of Foreign
Funds.
Prepared By ------------------------------------------------ Esmatullah Mohammady (17MBA1079)

4. 2) Diffusion and Composite Indices:
This technique measure the breath of a business cycle movement (Expansion or Contraction).
This provide an overview of the economic activity of a country. This index is constructed base on
consideration of different indicators such as leading, coincidental and lagging indicators. This
technique was first introduced by National Bureau of Economic Research in the United States.
3) Econometric Model:
Economists have developed Econometric Models to forecast the future state of the
economy. In Econometric model there are two types of variables:
a) Endogenous Variables: Variables that their value is determined within the model
base on other variables.
b) Exogenous Variables: Variables that their value are given outside the model and
determinates the Endogenous Variables.
Ex: The level of sales is Endogenous Variable and factors such as interest rates, level of
employment and income are Exogenous Variables.
Prepared By ------------------------------------------------ Esmatullah Mohammady (17MBA1079)

5. Process of Building Econometric Model:
To build econometric model we follow following steps:
a) Selection of the variables: Related variables are selected. Ex: If volatility of stock prices are
objective then factors such as GDP, Interest rates and FII are considered.
b) Categorization of Variables: In this stage selected variables are categorized in to Exogenous and
Endogenous Variables.
c) Specification of the Model: In this step mathematical relationship between variables are
established. Following function is Keynesian Consumption Function: Y = a + bx
d) Collection of data
e) Estimation of the Parameters: In this stage the collected data is put in to the statistical analysis
tools and are analyzed. In two variable model we can do manual calculation but when the
variables increase then its difficult to do manually so software such as SPSS are used
f) Forecasting: The processed information is used to forecast the future economic scenario.
Prepared By ------------------------------------------------ Esmatullah Mohammady (17MBA1079)

6. 4) Survey:
In this method through interview, personal contact and questionnaire information will be collected from
individuals and institutions to predict the future economic scenarios.
Prepared By ------------------------------------------------ Esmatullah Mohammady (17MBA1079)
References:
 Panithavathy Pandian, Security Analysis and Portfolio Management (2001)
 www.Investopedia.com
 www.wisegeek.com