Most variables can show either an upward or downward trend, depending on the base year chosen.
Econometrics may be defined as the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference.
After all, the past is our only real guide to the future, and historical analogies are instruments for distilling and organizing the past and converting it to a map by which we can navigate.
I work on the boundary between economics and statistics in this field called econometrics. Part of my interest is understanding how you use statistics in productive ways to analyze dynamic economic models.
The best way to predict the future is to study the past, or prognosticate.
Risk models are a substitute for historical knowledge, because they tend to work with just three years' worth of data. But three years is not a long time in financial history.
If you have to forecast, forecast often.
There are many types of economic data, but the type considered by Rob Engle and myself is know as time series.
In a sense, there are as many forecasting methods as there are forecasters. But I would argue that most projections are derived from two major methods: macro-econometric models and eclectic judgment.
Alan White and I spent the next two or three years working together on this. We developed what is known a stochastic volatility model. This is a model where the volatility as well as the underlying asset price moves around in an unpredictable way.
When I was a graduate student, estimating and interpreting distributed lags topped the agenda of macroeconomists and other applied economists.
If each of your time steps is one week long, you are not modeling the stock price terribly well over a one-week time period, because you are saying that there are only two possible outcomes.
Then: I google "time-series visualization" and start work on a new version of my model, thinking that maybe I can impress her with a prototype. I am really into the kind of girl you can impress with a prototype.
