TIME SERIES FORECASTING WITH THE CIR# MODEL: FROM HECTIC MARKETS SENTIMENTS TO REGULAR SEASONAL TOURISM

Technological and Economic Development of Economy. 2023. Vol. 29. No. 4. P. 1216–1238.

Orlando G., Bufalo M.

This research aims to propose the so-called CIR#, which takes its cue from the well- known Cox-Ingersoll-Ross (CIR) model originally devised for pricing, as a general econometric model. To this end, we present the results on two very different time series such as Polish interest rates (subject to market sentiments) and seasonal tourism (subject to pandemic lock-down measures). For interest rates, as reference models, we consider an improved version of the CIR model (denoted CIRadj), the Hull and White model, the exponentially weighted moving average (EWMA) which is often adopted whenever no structure is assumed in the data and a popular machine learning model such as the short-term memory network (LSTM). For tourism, as a benchmark, we consider seasonal autoregressive integrated moving average (SARIMA) complemented by the generalized autoregressive conditional heteroskedasticity (GARCH) for modelling the variance, the classic Holt-Winters model and the aforementioned LSTM. Results support the claim that the CIR# performs better than the other models in all considered cases being able to deal with erratic behaviour in data.

Keywords: interest rate, Forecasting, SARIMA models, Tourism demand, Heston-CIR model, CIR#, cluster volatility, jumps fitting, Hull and White model