Chapter 03-04 Economics Flashcards
CFAI Economics Flashcards
Business cycle
Fluctuations in GDP in relation to long-term trend growth, usually lasting 9-11 years.
Capital market expectations
(CME) Expectations concerning the risk and return prospects of asset classes.
Cross-sectional consistency
A feature of expectations setting which means that estimates for all classes reflect the same underlying assumptions and are generated with methodologies that reflect or preserve important relationships among the asset classes, such as strong correlations. It is the internal consistency across asset classes.
Diffusion index
An index that measures how many indicators are pointing up and how many are pointing down.
Econometrics
The application of quantitative modeling and analysis grounded in economic theory to the analysis of economic data.
Advantages: Robust, Consistent Application, Produces Quantitative Estimates.
Disadvantages: Complex and Time Consuming, Data inputs not easy to foreacst, model mis-specifaction, false sense of precision, rarely forecasts turning points well.
Economic indicators
Economic statistics provided by government and established private organizations that contain information on an economy’s recent past activity or its current or future position in the business cycle. Advantages: Intuitive/Simple, Identifies turning points, available from 3rd parties, easy to track.
Disadvantages: Subject to frequent revisions, not robust.
Grinold, Kroner model
An expression for the expected return on a share as the sum of an expected income return, an expected nominal earnings growth return, and an expected repricing return.
Input uncertainty
Uncertainty concerning whether the inputs are correct.
Intertemporal consistency
A feature of expectations setting which means that estimates for an asset class over different horizons reflect the same assumptions with respect to the potential paths of returns overtime. It is the internal consistency over various time horizons.
Leading economic indicators
A set of economic variables whose values vary with the business cycle but at a fairly consistent time interval before a turn in the business cycle.
Model uncertainty
Uncertainty as to whether a selected model is correct.
Nonstationarity
A characteristic of series of data whose properties, such as mean and variance, are not constant through time. When analyzing historical data it means that different parts of a data series reflect different underlying statistical properties.
Parameter uncertainty
Uncertainty arising because a quantitative model’s parameters are estimated with error.
Re-base
With reference to index construction, to change the time period used as the base of the index.
Reduced-form models
Models that use economic theory and other factors such as prior research output to describe hypothesized relationships. Can be described as more compact representations of underlying structural models. Evaluate endogenous variables in terms of observable exogenous variables.
