Actuarial Business Challenge 2016 (ABC 2016)

Ben jij analytisch aangelegd én geïnteresseerd in het managen van risico’s die veelal grote financiële gevolgen kunnen hebben? Dan is een carrière als actuarieel professional iets voor jou!

Vrijdag 27 mei 2016 organiseert het Actuarieel Instituut (AI) de tweede Actuarial Business Challenge om young professionals te laten ervaren welke uitdagingen je tegenkomt als je een carrière als actuarieel professional binnen de financiële sector ambieert.

Ben jij geïnteresseerd in een carrière binnen het actuariaat? Laat je dan inspireren op 27 mei 2016 en maak kennis met de mogelijkheden die het actuariaat te bieden heeft. Aan de hand van cases en workshops, begeleid door (actuarieel) professionals van Talent & Pro en Solid Professionals, krijg je de kans kennis te maken met wat het actuariaat en de verschillende opleidingen van het AI allemaal te bieden hebben.

Programma12.00-13.00 uur: Ontvangst en lunch13.00-13.15 uur: Inleiding13.15-15.30 uur: Plenaire workshop Case Product Development15.30-15.45 uur: Pauze15.45-17.15 uur: Breakout workshop 1 “Dag in het leven van junior actuaris”15.45-17.15 uur: Breakout workshop 2 “ALM-Game”17.15-17.30 uur: Studeren aan het AI17.30-19.00 uur: Borrel en BBQLocatie: Actuarieel Instituut in Utrecht.

Meer informatie of aanmelden?Meer informatie over ABC 2016 is te vinden op de website van het Actuarieel Instituut. Wil je deelnemen stuur dan een e-mail naar Leandra Pennartz, leandra.pennartz@ag-ai.nl, vermeld hierin ook welke workshop je wilt volgen na de pauze. Heb je vragen? Neem ook dan contact op met Leandra (leandra.pennartz@ag-ai.nl of 030-6866190).

Actuarial Business Challenge 2016! (ABC 2016)

Voor meer informatie en het volledige programma verwijzen wij naar de website www.ag-ai.nl/actuarieelinstituut. Heb je vragen over ABC2016 neem dan contact op met leandra.pennartz@ag-ai.nl of 030 - 686 61 90.

Actuarieel Instituut

Vrijdag 27 mei 2016 organiseert hetActuarieel Instituut (AI) de tweedeActuarial Business Challenge om youngprofessionals te laten ervaren welkeuitdagingen je tegenkomt als je eencarrière als actuariële professionalbinnen de financiële sector ambieert.

Ben jij geïnteresseerd in een carrièrebinnen het actuariaat? Laat je daninspireren op 27 mei 2016 en maakkennis met de mogelijkheden die hetactuariaat te bieden heeft. Aan de handvan cases en workshops, begeleid door(actuariële) professionals van Talent &Pro en Solid Professionals, krijg je dekans kennis te maken met wat hetactuariaat allemaal te bieden heeft ende verschillende opleidingen van het AI.

Ben jij analytisch aangelegd én geïnteresseerdin het managen van risico’s die veelal grotefinanciële gevolgen kunnen hebben? Dan is eencarrière als actuariële professional iets voor jou!

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Table of Contents

4 Word of the President

6 Ski Trip

9 Research Lecture

10 Joyce’s exchange in Oslo

12 Case Day

13 Puzzles

15 Inhouse Day

16 Go Karting

17 Forecasting with Macroeconomic Big Data, a research article by Stephan Smeekes and Etienne Wijler

22 Water Skiing

23 Belastingdienst: Cowboys in a candy store

24 Ultimate Frisbee

25 Naomi’s exchange in London

27 BBQ

28 Members’ weekend

32 Annual GMA

34 Committees

36 Farewell from the SCOPE | Vectum Board 2015-2016

PerVectum

Magazine for Econometricians at Maastricht University

Year 21, issue 4 of 4June 2016

Editor in ChiefKatherine FaulknerCo-editorsMarijke LijzengaSharon JanischkaMarie Ternes

SCOPE | VectumP.O. Box 6166200 MD Maastricht+31 (0)43 3883940NL34 INGB 0006 9295 73

Visiting AddressTongersestraat 43Room 1.0146211 LM Maastricht

secretary@scope-vectum.nlwww.scope-vectum.nl

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Dear Econometricians

Although it might be a real cliché, time has flown by. This board year, and the academic year, has already come to an end by the time you read this word of the president and your academic year has just ended. For many of you this will imply a big change in your life. For the master students, the student life will probably end here, and your working life will start. Third year students, are going to start their masters, either here in Maastricht, or somewhere else. For the second year students, a big adventure lies ahead; your study abroad. I really hope you will all have a great time there, and I can only advise you to take the most out of it! For our first years, who survived the first year, I first want to stress that I’m proud of you. Although it might not seem like something special now, it is really an achievement to make it to the second year. Furthermore, you can start orienting yourself on the great list of possibilities for your study abroad.

It has been an honour to be the president of SCOPE | Vectum, and it is sad to have to leave this position after a great year. On the other hand we, being the “old” board, have a lot of confidence in the new board, and I am happy to leave our heritage to Merit, in whom I have great confidence. It has been a great year for us, and I would like to reflect on the year in this word of the president.

During the year we mainly focussed on three types of activities: academic -, professional - and social activities.

To start with the academic activities, it was great to have a research lecture every block. Furthermore, we also had the LaTeX workshop and the master & PhD information evening together with the KE department. The extra tutorials were definitely an important addition to this for our first years.

Regarding the professional activities, we had our regular Business Trip. I want to thank my Business Trip committee for the great work, to make this event a success. Furthermore, we had the Case Day, which was unfortunately not fully filled in terms of companies. Additionally, we had the in-house day in Heerlen, at the Open University, together with SAS and Accenture. Besides the activities we organised as SCOPE | Vectum, there was also the LED (Landelijke Econometristen Dag, or National Econometricians Day in English), which was again a great success.

Lastly, we had our social activities. I would like to compliment both Ilina and Laura for their great achievements in this area. It was really nice to have many new activities, like water skiing and paintballing. It was great to finally have a combined end of (academic) year drink with the KE department. Both the staff

Word of the President

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and our students greatly appreciated this event, and we really hope to see this event again during the next year. Something else we added this year, was our Ski Trip, which was greatly appreciated by the participants. I would like to thank the Ski Trip committee for their great efforts in setting up this trip.

By the time you will read this report, you will know how the board of 2016 – 2017 will look like. We, as the old board, were really happy with the many applications we had for the board and have great confidence in the new board. We would like to wish them all the best of luck in the upcoming year.

During SCOPE’s GMA, Leann Poeth was announced as an honorary member of the whole SCOPE framework. On behalf of the whole “old” SCOPE | Vectum board, I would like to express our great gratitude for everything Leann has done for the framework. We are very thankful for everything you brought to the framework and we hope you will continue bringing your enthusiasm and input to the SCOPE framework.

Besides all these very important people, I would like to express a big thank you to my board. It has been a pleasure working with you, and I am really thankful for all the energy and input you have brought to SCOPE | Vectum.

I would like to wish the new board all the best of luck in their coming year! We have great confidence in you, and we hope that you will be able to achieve all your goals. Furthermore, as most of you probably

know by now, I will be leaving Maastricht this summer. I would like to wish you all the best! Enjoy your holidays and I hope to see many of you at the SCOPE | Vectum alumni drinks.

Martijn SchoenmakerPresident SCOPE | Vectum 2015 – 2016

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On April 2nd, twelve Econometricians were ready to head-off to the first Ski

trip in Vectum’s history. After a stressful week of exams, we were all excited to spend our well-deserved holidays in Val-Thorens, France. After a ten hour bus ride we arrived at our hotel “Le soleil” the next morning and, as the hotel was perfectly located (right next to the piste), we were eager to immediately head off to the slopes. We actually thought we would be smart by booking our skiing holiday for the beginning of April, expecting beautiful, sunny weather; well, retrospectively, we had to be disappointed. Even though the name of the hotel promised us something else, we actually only had one really sunny day (which of course was the day we all took pictures to make people jealous on Facebook). After getting our rentals we split up into different group, because we were all skiing on different levels. Where it was Merit’s and Marijke’s first time on skies, some others had a lot of experience.

Even though Val Thorens is located in “les Trois Vallées” which is the largest connected skiing area in the world with over 600KM of pistes, we decided to

stay in our valley on the first day. Being exhausted from the long bus ride we finished quite early and returned to our hotel where we were finally able to move into our rooms. Every night we ate at the restaurant in the hotel. While the waiters were extremely unorganised and rude, the three-course-menu was delicious, although sometimes for some of us - including me –not enough. On two nights we even had the chance to try cheese fondue, meat fondue or raclette.

On the second day, the group I was skiing with tried to be a little bit more adventurous. We left our valley and explored the one on the other side (as we found out throughout the vacation the weather was usually better there anyways). Unlucky for us, it was a really windy day. Even more unlucky was that we got stuck in a gondola for over an hour because of the wind. Whereas Eric, Katherine and I spent the hour with a family with a mother that was close to having a heart attack as the gondola was shaking so much, the other three girls (Lea, Huguette and Ilina) were luckier with their company consisting of young, attractive males. Unlucky for Katherine and me! After we finally got of the gondola, after an hour, we planned on getting back to our valley since Katherine wanted to join her snowboard lesson. Unfortunately, they had closed all the upper lifts that were supposed to take us back to our valley due to the wind. A nice lady explained us which alternative route we could to take back (a description containing of approximately ten lifts and at least as many slopes – I got

Written by Marie Ternes

Ski Trip

June 2016

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lost half-way through the explanation). As Katherine had to hurry up to make it to her lesson, she and Eric went ahead, whereas Ilina, Huguette, Lea and I took it slower. The way back was a disaster, the snow was super slushy, because we were really far down the hill, I lost my gloves and the way was mostly containing flat stretches. Another problem was that they continued shutting down the lifts even at the bottom of the hill. We decided to give up at some point and just took the bus back to our valley. Eric and Katherine made it back the entire way though. As they were too late for Katherine’s lesson, they decided to check out an Après-Ski which in the following days became our standard place to go at the end of the day.

On the third day we were really disappointed that we mainly had to ski in our valley since the lifts were still closed on the top, but on the fifth day (the only day with amazing weather) we convinced

Merit, who improved impressively fast in skiing, to come along with us to the highest glacier in the skiing area (above 3200 meters). The view on top of the glacier was beautiful as we were above the clouds. Martijn and Roderik decided to use this beautiful day to finally ski through the entire area from one end to the other and back in an impressive time of 3.5 hours. On the sixth and last day my group wanted to explore the entire skiing area as well. As the weather was a disaster (it was so foggy and cloudy you could not see where the slope ended and the sky began) it took us over six hours and as Ilina nicely put “well we skied through the entire area, but we can’t say that we’ve seen any of it.”

We always organised our evenings differently. One night we joined the Pub Crawl arranged by Husk (the organisation we planned the trip with), but the highlight of our week was definitely our

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self-organised-paid-by-Vectum Beerpong Tournament. While all teams were really competitive, there was one team, consisting of Lea and Eric that was unbeatable. The other nights we usually spent in the guys’ room, watching some of Edwin’s videos he shot with his GoPro throughout the day, while playing some well-known drinking games. While we proudly managed to not get a complaint for four consecutive nights, we got one of course the very last

night, the night we were the quietest. On Friday night we took the bus back to Maastricht after six days of skiing, snowboarding and a lot of fun. I would like to thank the Ski Trip Committee consisting of Martijn, Roderik and Eric for making this first Vectum Ski Trip happen and I hope there is going to be the second one next year (which I would definitely join again).

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Research Lecture

After spending a great week in the snow, we were back in Maastricht to start off a new period with a research lecture given by Mr Heinemann. The lecture was in the

field of Actuarial Sciences. The topic of the evening was “Lee-Carter and a GLS Approach to Factor Models”, whereby we looked at the life expectancy in the Netherlands. After the lecture, we had the Board Information Evening. Here, Martijn gave insight into the four board positions, what it is about being a board member and the application procedure. As we learned during the lecture that we still have some years to live, we went to the Ma van Sloun afterwards to celebrate life while enjoying a beer!

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I chose to spend my exchange semester in Norway for a couple of reasons. I wanted

to stay in Europe, but also see a different culture in a country I never visited before. Besides that, I thought Scandinavia was the perfect place to travel around. The main part of my family and friends thought I was crazy, but going to Oslo turned out to be the best decision I could have made! I made new friends seconds after I arrived in the city, and people from the university did everything to make you feel welcome.

From arrival onwards two weeks of introductory activities and parties were organised. From ‘how to learn Norwegian in two hours’ (did not work) to sports tournaments and big parties in the evenings. Besides that, an event was organised especially for exchange students on how to deal with Norwegian people and some of their weird habits. Just to mention a few, Norwegians that do not know each other will never sit next to each other in public transport, they won’t start a full conversation to a stranger unless they have had alcohol, and pre-drinks start at 4pm. So yes, although it is less than a 2 hour flight,

there really are some cultural differences!

The nice thing about Oslo was that student housing areas were located throughout the entire city. I lived at Kringsjå (still cannot pronounce that properly) which is a student village close to a lake that was the best place to have a barbecue in summer. Although I did not live in the city center, it only took me 15 minutes by public transport to get there or to go to university. The huge university building contained everything you needed for studying, as well as a gym and multiple coffee corners. I would say it is close to a modern version of Hogwarts.

Joyce’s Exchange

June 2016

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Besides spending time in Oslo I made quite a few great trips around the country. Bergen is definitely a must-see and even travelling there (7 hours by train) was worth the views. As people convinced us that the only way to make Norwegian friends was by joining their activities, me and some friends joined a student outdoor association with which we went on a great weekend full of hikes. At Preikestolen you have amazing views, and at Kjeragbolten (the rock between two mountains) it gets even better.

Nevertheless, the highlight of my exchange was to go dogsledding in Tromsø, up north in Norway. Although the northern lights were not really bright when we were there, it was an amazing experience which I could recommend to everyone.All in all, I had a great time in Norway and I cannot wait to go do and see the things I did not get the chance to do there yet!

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This year, the case day was a bit different than the years before. Instead of two

cases with a lunch in between, the day started off with a presentation by Jeroen de Haas and Thijs Verhaegh, who had conducted a research on job prospects of econometricians. The presentation was called “Econometrics: what is my future?”, as it showed where graduates of different universities ended up.

Once the presentation was finished, we continued with a case by Kleynen Consultants. During the case, we had to replicate portfolios of insurance

policies and optimise them using excel.

After enjoying a well-deserved lunch at Preuverij, a presentation was given by a representative of Actuarieel Genootschap and Actuarieel Instituut. Unfortunately, the man expected a Dutch audience and, thus, prepared Dutch slides. Nonetheless, the presentation was very interesting and hopefully also comprehensible for our non-Dutch speakers.

Though different than other years, I think we can conclude that it was an interesting case day again.

Written by Bas van Andel

Case Day

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Puzzle 1After weeks and weeks of trying, Flonja succeeded in convincing Claudia to get an alpaca with her, which they named Chris. While walking Chris in the woods they lost each other. After a few hours of desperation they saw each other from 1 kilometre distance. Chris, who was accompanied by Claudia, was so happy to see Flonja that he started running towards her, but when he reached Flonja he turned around and ran for Claudia again. He continued doing so until Claudia and Flonja were reunited. Taking into account that Claudia and Flonja were walking at 3 kilometres an hour and Chris was running at 9 kilometres an hour, what is the distance that Chris has run?

Puzzle 2After a heavy party at Johanna’s house, Eric has lost his table tennis bat. He started asking around to see if someone had taken it. As it turns out, only four people think they saw someone something; Majd, Anne, Roderik and Jeroen. The only thing they agree on is that it was a girl. Majd thought it was a tall, brunette girl with glasses who was drinking wine. Anne remembered seeing a small blond girl. She agrees she was wearing glasses and drinking wine. Roderik echoed that she was an averaged height, red haired girl with glasses and a bottle of beer. Jeroen told Eric that the girl was tall and drinking wine, she had black hair and was not wearing glasses. Due to the amount of alcohol the four witnesses had assumed, Eric could assume that every witness was only correct about one thing, but he could trust them to have collectively described every detail correctly. What are the correct details of the girl who took the table tennis bat?

Puzzle 3After a nice small bbq at Bram’s place, all the guests turned out to have broken something. Even though Bram has quite some repairing to do, he doesn’t mind the small things. The only thing he wants help with repairing is the window. He gathered some information and is trying to find out who broke the window.All the guests were positioned on 5 different coloured chairs. Each guest broke something, but everyone broke something different. Every guest has his/her own beverage and his/her own secret passion, which Bram of course revealed. Furthermore he has a few hints;- Laura was sitting on the red chair- Marc broke the sink- Stan was drinking wine- The green chair was on the left of the white chair- The person sitting on the green chair was drinking beer- The person who has the secret passion of puppet shows, broke a glass- The person who sat on the yellow chair has the secret Passion of ballet- The person who sat on the middle chair was drinking tea- Freija was sitting on the first chair- The person whose secret passion is American football, sat next to the person who broke the chair. - The person who broke the vase sat next to the person whose secret passion is Ballet - The person whose secret passion is math was drinking vodka- Dominik’s secret passion is chocolate - Freija sat next to the blue chair- The person whose secret passion is American football sat next to the person who drank coke.

Puzzles

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Solution to Puzzle 1At a combined speed of 6 kilometres an hour, Flonja and Claudia take 10 minutes to reach each other. In these 10 minutes Chris will have run 1.5 kilometres

Solution to Puzzle 2If you summarise the details in a table

hair height drink glassesMajd Brunnette Tall Wine YesAnne Blond Small Wine YesRoderik Red Average Beer YesJeroen Black Tall Wine No

Per detail only one witness can be right; otherwise there should be more details where someone else was right. Therefore, the girl was not wearing glasses, so Jeroen was right about that, so the rest of what he said was incorrect. Therefore, the girl was drinking beer, was small and brunette.

Solution to Puzzle 3Chair 1 2 3 4 5Color Yellow Blue Red Green WhiteName Freija Stan Laura Dominik MarcBeverage Coke Wine Tea Beer VodkaSecret Passion

Ballet American Football

Puppet Shows

Chocolate Math

Broke Chair Vase Glass Windows Sink

Solutions to Puzzles

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Written by Roderik Turksema

Inhouse Day

On a relatively warm and dry morning in April, a bunch of Vectum members

had to wake up way too early (around 7am) to attend the Inhouse day with SAS & Accenture at the Smart Services Hub in Heerlen. After a relatively uneventful journey we arrived at the Service Hub where we were welcomed with some coffee, which at that point we all badly needed.

Next we were all whisked into a lecture room and the case day began. Starting with an introduction to both SAS and Accenture we had the opportunity to get to know both companies a little bit better. It was explained to us that today SAS would provide the software and the case would be based on a typical problem faced by Accenture. The case was a data set of supermarket customers’ membership accounts, which needed to be analyzed to see how the supermarket chain could best promote a new biological product.

After applying a series of regression models as well as other tools from the SAS software (which is really convenient and easy to use) my team thought we had a pretty good idea as to how best to promote the new product and we were allowed a break again. However coming back from this break we discovered that the room we had just come from had been changed and we were treated to a surprise escape room. I am very proud to say that my team escaped first, but what we can all be proud of, is that every team finished the challenge in around half an hour while it was supposed to take an hour, so congratulations to everybody.

Then finally when the escape room was cleaned up it was time for us to present our findings to a jury of SAS and Accenture representatives. All the teams explained their workings and presented what they thought would be the best course of action for the supermarket chain. Then the jury grilled each team and finally a winner was chosen. It was a very exciting experience which allowed us to learn but which each and every one of us also thoroughly enjoyed. Ohh and did I mention my team also won the case that day? it was good day.

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At the beginning of the fifth period, we gathered at the station for quite a special event: go karting!

Indeed, we took a train to Echt, where the karting track was located. Then, we were divided into 3 groups, depending our level and experience. We were all looking forward to racing each other on that track! Personally, I had already driven a kart several years ago, so I knew the sensations and the feeling that this activity could provide, but for many other students it was completely new. I guess I am right if in saying that they all enjoyed this activity!

Before starting the race, we had to wear a special jacket and a helmet.There were some minor crashes (in these cases the race had to stop) but nobody was injured, hopefully… Our lap times were recorded and there was an overview of them after each session. Congratulations to Jacob and Roderik, who were the two fastest drivers! After all, I really liked this event and I hope it will remain in SCOPE | Vectum ’s calendar in the following years!

Written by Hugo Schyns

Go Karting

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Written by Stephan Smeekes and Etiënne Wijler

Forecasting with Macroeconomic Big Data

Forecasting with Macroeconomic Big Data

Stephan Smeekes Etienne Wijler

Introduction

The current age of Big Data gives us a huge amount of data to perform statistical analysis on;even in traditional fields as macroeconomics. In this article we discuss how the forecasting ofmacroeconomic variables can benefit from using Big Data, what kind of econometric techniquesare available in this setting, and what issues are still unresolved. This article is based on ourpaper “Comparing forecasting performance of high-dimensional time series methods”, which iscurrently in progress (and available on request).

The Forecasting Model

In this article, we focus on the following basic model. We observe a time series y1, . . . , yT , whichis typically an important macroeconomic indicator as GDP, unemployment or inflation. We alsoobserve time series xi,1, . . . , xi,T for i = 1, . . . , N . We want to use these N time series and thelast p lags of yT to forecast the next observation yT+1. Assume the following model applies:

yt+1 =

p∑j=1

ρjyt−j+1 +

N∑i=1

βixi,t + εt, (1)

where εt is a zero-mean error term. We also assume all variables are stationary processes, whichmay for instance be achieved by taking differences of the original series when needed.1

If N and p are small, this is a standard linear regression model to be estimated by ordinaryleast squares (OLS). We can use the data up time T for yt and up to T − 1 for xi,t to estimate

(1), giving estimates ρ1, . . . , ρp, β1, . . . , βN . Then we can forecast yT+1 as

yT+1 =

p∑j=1

ρjyT−j+1 +

N∑i=1

βixi,T . (2)

However, in the Big Data setting we have a large number of (potential) predictors available,meaning that N is large and using OLS is not an option. Before discussing these econometricissues, we briefly discuss how such a dataset can be constructed.

Macroeconomic Big Data

We can use “standard” macroeconomic variables as predictors; e.g. to predict unemployment wemight want to use a measure of output like GDP. Yet such established relations only get us fewvariables. Stock and Watson (2002) constructed a database of over 215 monthly U.S. variablesrecorded for about 40 years. These variables represent different aspects of the real and financialeconomy on disaggregated levels (often per sector). This database (and its updates) have since

1We can also add lags of xi,t if we want to, or forecast h periods ahead by replacing yT+1 by yT+h.

1

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regularly been used for macroeconomic forecasting by academics and institutions such as centralbanks. A noteworthy “Stock-Watson type” database is the FRED-MD database which contains135 U.S. monthly economic variables. This database is updated every month and is freely avail-able for download at https://research.stlouisfed.org/econ/mccracken/fred-databases/.

A second, less traditional set of Big Data that is being explored, is the new kind of datagenerated by our digital world. Google Trends produces time series of the frequency of searchterms or categories in Google, which appear to have predictive power (Choi and Varian, 2012).Similar data from social media such as Twitter or Facebook are also being investigated. However,while the success of the Stock-Watson type data for macroeconomic forecasting is undisputed,the usefulness of these new types of data is still being explored.

High-Dimensional Statistical Analysis

If N is large, estimating (1) by OLS is a bad idea: if N > T , we cannot use OLS anymore as ourX ′X matrix is not invertible, but even with N smaller than, but still quite large relative to T ,OLS becomes very imprecise and unreliable. This is a general problem, often called the curse ofdimensionality, when we have many parameters compared to the number of observations, suchthat we essentially have only very free few observations available to estimate these parameters.Such a high-dimensional problem therefore requires a different approach. We must in one wayor another reduce the dimensions of the parameters, such that it becomes feasible to estimate.We discuss two prominent ways to do.

Method 1: Common Factor Models

The most prominent way of dimensionality reduction, used by Stock and Watson (2002) andmost econometricians after them, is to assume a common factor structure on the predictors.Specifically, we assume that most of the variation can be explained by a small number of factors,that is,

xi,t = λ′iFt + vi,t, (3)

where Ft is the (unobserved) r-dimensional vector of factors common to all predictors, λi is itscoefficient vector (usually called loading) for unit i, and vi,t is an error term that should be (closeto) independent over i and t. The factors Ft can be thought of as unobserved processes relatedto the “state” of the economy that drive all variables. The method of principal components canbe used to estimate Ft and λi by minimising

∑Ni=1

∑Tt=1(xi,t − λ′

iFt)2. The vector of estimated

factors Ft is then inserted into the predictive regression (1) instead of the original predictors:

yt+1 =

p∑j=1

ρjyt−j+1 +

r∑k=1

γkFk,t + εt. (4)

As r is normally much smaller than N (typically smaller than 10), the number of parameters toestimate is dramatically decreased, and (4) can then simply be estimated by OLS. Moreover, alarge N actually helps to estimate Ft accurately. However, as r is typically unknown it has tobe estimated as well, and the success of the method can highly depend on it.

Method 2: Penalised Regression

Our second approach, penalised regression, adds a penalty on the size of the coefficients to theobjective function of least squares. The penalty ensures that coefficients are shrunk towards

2

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zero, and if chosen cleverly, that coefficients are set exactly equal to zero. This way the methodalso performs variable selection, deleting those variables that are found to be irrelevant. Sucha method therefore also tells us which variables are important for prediction, which is a majoradvantage compared to factor models, where the estimated factors are more difficult to interpret.

The most popular method is the Lasso developed by Tibshirani (1996), which minimises thefunction

T−1∑t=1

yt+1 −

p∑j=1

ρjyt−j

N∑i=1

βixi,t

2

+ λ

p∑j=1

|ρj |+N∑i=1

|βi|

(5)

over ρ1, . . . , ρp, β1, . . . , βN . Here λ determines how strong the penalty is, with a large λ meaningthat many coefficients will be set to zero.2 The underlying assumption to make the lasso work,is that of sparsity in the coefficients. This means that many coefficients are zero in reality, orequivalently, that many of the predictors are irrelevant. The sparsity in the Lasso estimates isinduced by penalising the absolute values of the coefficients. To understand why this is the case,recognise (5) as the Lagrangean form of a least squares minimisation under the constraint thatthe sum of the absolute coefficients is smaller than some constant. This constraint is plottedtogether with a contour plot of the sum of squared residuals in Figure . As the solution for theobjective function (5) is obtained on an intersection of the constraint region and the RSS contourplot, it is easy to see why the Lasso produces a solution where one (or multiple) coefficients areset equal to zero.

Econometric Challenges: Which method should we use?

If we knew which of the factor model or the sparse model were closer to the true unknown datagenerating process, we could choose which method to use accordingly. However, typically wedon’t know this and we cannot estimate it. One might argue that the sparsity assumption isunlikely to hold in economics; penalised regression methods originate from machine learning andfields such as biostatistics, where they are for instance used to determine which genes matter forhaving a certain medical condition. Assuming there that only a few out of many candidate genesactually matter seems plausible, but this is more difficult to argue for the economic datasets weconsider. This argument has led many people to focus on factor models in economics. To be ableto provide a more quantitative argument on this matter, in our paper we investigate using MonteCarlo simulations how both methods perform if they are used on a “wrong” dataset; that is, if theLasso is used on data with common factors or principal components is used on a sparse dataset.Our analysis surprisingly shows a clear advantage for penalised regression methods; they are farmore robust to model misspecification than principal components, which easily breaks down ifthere is no factor structure. Even if there is a factor structure, but it is only approximately true,that is, there is still dependence in the error terms vi,t in (4), the lasso delivers more accuratepredictions than principal components!

Econometric Challenges: Statistical Properties for Economic Time Series

Economic time series are characterised by variables and error terms that exhibit serial correlationand heteroskedasticity. The properties of principal components are now well understood in thesesettings, but the same cannot be said for penalised regression methods. Given their origin in

2It is not so straightforward how to choose λ in practice. Several methods are available, but it is unclear whatthe optimal way is. Also note that to ensure that certain variables are always selected (such as the lags of y),they can be left out of the penalty.

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Figure 1: Graphical representation of the Lasso solution

different fields, these are not designed for time series analysis and their properties are only nowbeginning to be understood. A related issue in economic data is the presence of long run trendsin the data (unit roots). Typically the associated issues such as spurious regression, whereregressing two unrelated unit root processes on each other would give significant results, areavoided by taking first differences to transform unit root processes to be stationary. This hastwo disadvantages however. First, every series separately has to be manually checked for unitroots. If N is large this can be rather tedious. Second, by taking first differences, one ignoresthe true long run cointegration relations that may be present between variables. This will makeforecasting performance worse. Therefore ideally one would like to allow for unit root processesdirectly. While for principal components theoretical results for unit root series exist, this is notthe case for penalised regression, except for a few very recent papers that cover only specificsettings. In the paper we investigate the performance of the methods for series with unit rootsby Monte Carlo simulation. Our results are mixed: while the Lasso applied without taking unitroots into account appears to still function on cointegrated data, it tends to select too manyirrelevant variables, also making it susceptible to spurious regression. Careful screening of allthe variables is therefore still necessary.

Econometric Challenges: Empirical Performance

If one is mainly interested in forecasting, then perhaps the best measurement of the methodsis seeing how well they are capable of forecasting real data. We therefore apply the methodsto the FRED-MD dataset, and predict eight macroeconomic variables in that set. To performout-of-sample forecasts, we do not use the last part of the sample for the estimation, but only for

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evaluating the forecasts. For our first forecast, we estimate the models using the first 10 yearsof data, and forecast the variables after these ten years plus several months (depending on howfar we want to forecast into the future). This gives us a forecast that can be compared to therealised value, given that this is in our dataset too. Next, we shift our estimation sample onemonth ahead, and also forecast one month further into the future. This strategy, called rollingwindow estimation, we repeat until we reach the end of the sample. This gives us a sequence offorecasts that can be compared to the realised values, while making sure that the forecasts are“fair” in the sense that they only use information from periods before the forecast. Althoughone should always be careful not to put too much emphasis on such a “horse run”, as for adifferent dataset one may get different outcomes, it is quite striking that for nearly all of oureight variables under consideration, the penalised regression methods perform better and delivermore accurate forecasts.

Conclusion

Although the theory of factor models and principal component analysis for economic time seriesis much better developed than the theory for penalised regression methods, our simulations andempirical application show that the latter have great potential for economic forecasting. It istherefore important that the theory for penalised regression is further extended and developedto be applicable for economic time series. The analysis of unit roots and cointegration is onedirection that needs further work. Another, so far not discussed in this article, is how to doinference. To construct interval forecasts, or test whether the coefficients of certain variables aresignificantly different from zero, we need the asymptotic distributions of the estimators. This isvery complicated for penalised regression and still very much an open issue, in particular in thetime series setting. We plan to address such issues in future work.

Interested by the topic? Want to learn more?

The new master courseHigh-Dimensional Econometric Methods for Big Data (EBC4218)treats the analysis of methods like principal components, penalised regression and techniquesfrom machine learning, and their application to economic high-dimensional problems, in detail.The course is an elective for both econometrics and research master students, and will take placefor the first time in the academic year 2016–2017 in period 2.

References

Choi, H. and H. Varian (2012). Predicting the present with Google Trends. Economic Record88 Supplement s1, 2–9.

Stock, J.H. and M.W. Watson (2002). Macroeconomic forecasting using diffusion indexes.Journal of Business and Economic Statistics 20, 147–162.

Tibshirani, R. (1996). Regression shrinkage and selection via the Lasso. Journal of the RoyalStatistical Society (Series B) 58, 267–288.

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On Tuesday the 4th of May we went to Belgium with nineteen people

for the amazing activity waterskiing/wakeboarding. After finding our way, the struggle with the wetsuit and a short explanation we could start.

Most of us tried waterskiing at the big round first and fell into the water after a few seconds. Some kept trying and succeeded in the end to stand a whole round, or as happened with Chiara, Evy and a few others, fell after half a round which meant that they had to walk or swim the whole end back.

Some others and I went to the small round, which was just 100 meters back and forth. There we tried wakeboarding. Especially the moment that you were in sit position and had to stand up, was difficult.

We were very lucky that the weather forecast (which was rain) did not came out and that the sun was shining. It was still very cold, especially when you came out of the water, and when you were finally warm, it was your turn to try again. But this and the fact that I had muscle pain for 3 days, was all worth it and I hope that this activity will also become a yearly.

Written by Lisa Snijkers

Water Skiing

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Vincent Langen - Data Scientist Belastingdienst

Cowboys in a Candy Store

Solving puzzles: that’s my passion. Combine that with economics and I like it even better! If many people can then benefit from my solution, I feel even more satisfied. At

the Belastingdienst, my day to day job consists of solving puzzles. Together with at least twenty colleagues we analyse data and the processes related to this. The Belastingdienst offers an infinite amount of data that can be analysed. Even though we work with complex and highly protected databases, the Belastingdienst is a candy store for every data analyst.

Data from the past doesn’t guarantee the futureThe Belastingdienst has over 16 million ‘customers’. These customers might stay forever, but it is of great importance that they are all being treated in a correct and fast way. Therefore, our main goal is to make sure that the processes will become more and more efficient. By analysing behaviour, we can for example estimate where the probability of making a mistake in submitting taxes, whether or not by accident, is the largest. At the same time we aim to decrease the amount of objections. By collecting data from the past, we ensure that in the future everyone will pay exactly the amount he is obligated to, which is an important foundation in our society.

The cowboys of the BelastingdienstOur job does not only influence the taxpayer. Also internally, we aim to run the processes as efficiently as possible. This means that within the organisation we start with bringing our ideas for improvements into practice. Sometimes I say we are the cowboys of the Belastingdienst. Our team is young and motivated. We are not afraid to think outside of the box. However, we also don’t act like a bull in a china shop. Changes in an organisation like the Belastingdienst need to be implemented in a solid way. Safety and privacy are really important aspects for us. Therefore, we follow different training programs, in the technical area as well as in the area of communication and presentation.

Developing in an open atmosphereI have already worked as a data-scientist for three years and in this time I’ve learned a lot. A personal tax return led me to the website of the Belastingdienst, where I found this vacancy. I graduated after the financial crash in 2008 and was sure that I wouldn’t want to work for a bank. In addition to the social benefits of my work, I also find it a really great place to work. I have a lot of responsibilities and freedom to share my work. The atmosphere is open and the working conditions are great. Nevertheless, you have to work hard. There is a lot of work left to do, so I expect that our team will continue to grow over the next few years.

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In week 5 of this block an Ultimate Frisbee clinic with Vectum was finally meant to

happen. Now some more of you finally know that Ultimate Frisbee is not about throwing a disc at the beach but that it is an actual sport. We as Ultimaas, which was actually founded by econometricians, were really happy to teach you throwing and to show you what the game is about. For those of you who weren’t there, here’s a short description.

Ultimate is a self-refereed and non-contact team sport played with a flying disc, a “frisbee”. You play seven versus seven on a field that’s half the size of a soccer field and you score a point when you catch the disc in the opposite end zone. It is a fast-paced sport and includes lots of running (read: sprinting!). Sounds easy, right? Have a look at the short trailer we made two years ago (and maybe you’ll even recognise some econometricians! https://youtu.be/3NucNka6mgg

Let’s hear what Christian’s impression of Ultimate Frisbee is.

“After a short warm-up we were ready to start. But everyone who was thinking that we would be playing immediately was wrong. Everything needs practice and so the Ultimaas members taught us the different throws you need in a game to react in the optimal way to every possible

game situation. I was pretty surprised about the several throwing techniques. I only knew the “usual” one before and it was very interesting (and challenging) to learn new styles of throwing a frisbee for instance the “overhead” one.

The game is not only about throwing, a big part of the game is the running in the field. So our next practise was to learn different running lines both for attacking as well as defending.

Finally we had a game, which was a lot of fun. I really liked that you make progress quite quickly, so although we were absolute beginners we had some nice combinations in the field. Furthermore frisbee is a quite fair sport, and a great team spirit, plus respect for the opposition, are the two main pillars of the sport. Thanks Ultimaas for this superb experience and a lot of success for the future!”

Written by Merit Geldmacher & Christian Wirths

Ultimate Frisbee

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Hey there, my name is Naomi Schippers and I spent my exchange semester at

the University of Western Ontario, Canada. I chose Canada for several reasons. First of all, I wanted to go to a country that was English speaking and that is why I chose to study at a university in Ontario, since this part of Canada is English speaking. There is of course the French speaking part of Canada, but given that I’ve only had one year of French in high school, it did not seem like a good idea to go to a French speaking university. Second of all, I wanted to experience the typical campus life that is portrayed in movies. I did not want to go to America given that I have been there many times on vacation already, so the next best choice was Canada. The University of Western Ontario had a fairly big campus, even so everything was still walking distance from each other. Which is why when I was there I mainly walked to class, but depending on if you go in the winter semester I would not suggest walking in 5 inches of snow. The campus had several buildings for classes, with each building being specific to your school department, and they also had several buildings scattered around the main campus that were meant for student housing. For the most part these student housing buildings were meant for first years, in which you had to share your room with another student and share the bathrooms with about 15 students on your floor. But fortunately for me, the university has two student housing buildings that are for the most part meant for exchange students or international students. In these buildings you share an apartment with 2 or 3 other students, and if you’re lucky you will have a Canadian

in your room that can show you around London or their own home town.

While I was on my exchange I met a lot of new people and from all over the world. In my building there were some Canadian, Dutch, Jamaican, German, English, Australian, Belgium, Mexican, and Chinese students. For the majority these students were also on exchange and some were international students at the University. Because the environment was new to everyone and no one knew someone in London, it was really easy to make new friends and everyone was generally more open to making new friends. The Canadians are also very nice people and they will most probably invite you to their homes. For example, I had a Canadian roommate that was in her third year. Usually it’s not normal for a Canadian to live on campus in her third year, but my roommate was going on exchange in her winter semester to Australia.

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My roommate invited me along with three other friends of ours to visit her home town Kincardine, a small municipality located on the shores of Lake Huron in the province of Ontario, it is a two-hour drive from London. It’s very difficult to reach this town by public transportation, so her parents offered to come and pick us up by car, which is way too kind of them! It was nice to see a small town of Canada and to be able to see what their beaches are like.

Besides Kincardine, I also did some travelling within Canada, namely Toronto which was about two to three hours from London, Quebec City, Montreal, and Ottawa. I travelled to Quebec City, Montreal, and Ottawa by bus with a group of friends and some exchange students from Toronto. It was a very long bus ride to all three of those cities, but it was definitely worth it. Seeing as London is really close to the American border I also travelled to New York City and Chicago.

As for activities to do in London itself, I would recommend Homecoming and Halloween. At Western they take football really serious and at the beginning of the football season they would have something called homecoming. On this day all the university students of Western along with students of other universities would wear purple and celebrate all over the campus and watch the football game as well.

Another must do when you’re in Canada is go visit the Niagara Falls. It is truly amaz-ing and beautiful, especially from the Ca-nadian side, because on this side you can see the waterfall a bit better than if you were on the American side.

All in all, I loved my exchange semester in Canada. I became friends with so many people, and I would love to one day have a reunion with all the friends I made there.

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In week 6 of period 5 we had the end of year barbecue, which took place

in Katherine’s garden. After everyone arrived, the barbecue was turned on and we all enjoyed the meat, bread and salad while talking and catching up with each other.

Soon enough a Flunkyball game started with the first years playing the second years, in which more than half of the group participated, while the others watched and cheered them on. As always at the Vectum barbecue, there was a kiddie pool filled with ice and drinks and while some people only enjoyed the cold drinks others saw the opportunity to pick up their friends and dip them in the ice cold water, much to the delight of the people watching.

After eating ice cream and s’mores the whole group came together to play a game of ‘Never have I ever...’, which was a lot of fun not only because of interesting statements by some but also because everyone participated, so that we could share some laughs together at the end of the year. We had to stop too soon though, since some of the neighbours didn’t like us having fun, so after cleaning up the garden we went to the Ma van Sloun to have a last drink and enjoy the rest of the night.

Written by Johanna Sturm

BBQ

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Written by Lea Bottmer

Friday, June 10, was the date everyone had been impatiently waiting for

basically since the beginning of the academic year- the start of the notorious Members’ Weekend! Throughout the year, us first years had heard so many hilarious stories we couldn’t wait to finally experience the crazy trip ourselves and the rest of the years couldn’t wait to repeat the long nights and create new memories. And what can I say- the weekend definitely lived up to its expectations!

We met on the Friday afternoon at the parking lot of the SSC- still not knowing where and how we would spend the weekend. This was kept a secret throughout the entire year. After the drivers got the directions to the beautiful La Roche-en-Ardenne in Belgium the adventure and an amazing weekend began. Two hours later after driving on the worst roads I have ever driven on, we finally reached our destination- a huge and really nice house where we would spend the next two days. Each room had a different theme and was furnished accordingly. We even had a kids’ corner that Flonja and I really enjoyed! After getting settled in and a few rounds of pool or card games later, the BBQ finally started (everyone was super hungry). Martijn

took over the spot at the BBQ again and made sure that everyone got enough food.

Once everyone was full, we got ready for the Friday night activity that Eric and Marie planned. Unfortunately, the original game (capture the flag) couldn’t be played because the surroundings were not good enough, so they had to improvise and we started off with playing a round of Flunky Ball near a river a bit down the street. As we scared off the fish in the water with our enthusiasm, the fishers, who were standing at the shore of the river, left shortly after we started our game. We then continued to play a variation of tag until it was so dark that we could hardly see anymore, so the party moved back into the house where we played a round of a special form of Item Bingo.

This was a fun and also quite active activity, but the real challenge was to establish the bingo sheet. The numbers had to be multiples of the numbers of two dice. Being econometricians, one might think

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that this should be a piece of cake for us, but one group managed to write down a number on their sheet that wasn’t even possible to occur. When the actual game started, people were running around trying to find random items like condoms, the anti-natal pill, pencils, sunglasses, shampoo, hand lotion etc. to place them on their sheets. This being the last game for the night, the group dissolved and spread around the house. Some people enjoyed the weather outside with some shots, while others were inside playing pool or just chilling in someone’s room. Towards the late night/early morning hours, some people went to bed while others discovered their artistic talents. All in all, it was already a successful first night.

On Saturday, after everyone enjoyed their tasty breakfast, the next stop was tree climbing where we could show off our active side. After two hours of climbing through the trees, flying through the air and having lots of fun, it was time to go back to the house.

There we had a free afternoon and some people watched soccer, while others went into town, played pool, went for a run or took a nap to get some energy for the night.

After a really delicious dinner, everyone helped to set up the place outside for the famous Vectum cantus, organised by our (old) president, Martijn. Once more, we discovered that most of us should have gone for a career as a pop star instead of studying econometrics. The most impressive act of the night was Katherine who can definitely start singing in a Dutch girls’ group. The cantus was only the start of another fun night that lasted until dawn.

On Sunday, it was already time to say goodbye to our cozy house. After a late breakfast (or more an early lunch), we cleaned the house and people left one after one back to Maastricht or Lille in the case of the German guys (to watch the German football match).

I would like to thank the activities committee, especially Laura, for organising such a fun and successful weekend. We all had an amazing time and enjoyed every second of it.

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Members’ weekend collage

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E M A S

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Heb jij de Master titel Econometrics and Operations Research, track Actuarial Sciences vande Universiteit van Maastricht, dan krijg je vrijstelling voor de eerste drie courses van hetEMAS-programma.

Ben je geïnteresseerd in wat EMAS jou te bieden heeft, neem dan directcontact op met Leandra Pennartz op telefoonnummer 030-686 61 50 ofper e-mail leandra.pennartz@ag-ai.nl.

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Wat biedt EMAS jou:

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E X E C U T I V E M A S T E R O F A C T U A R I A L S C I E N C E U P D A T E 2 0 1 6

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The annual GMA took place on June 17th. First the old board presented

their achievements during the past year which were really impressive.

Martijn talked about the changes in the SCOPE framework, the good cooperation with the KE-department and the LOES. He explained that he was able to organise another successful business trip and for the first time in Vectum’s history a ski trip.

Afterwards Bram told us about the companies that sponsored SCOPE | Vectum during the past year. Then he went through the business related activities like the annual Case Day and the Inhouse Day. Next up was Katherine. She showed us that the database of current students and alumni has been brought up to date during the past year and SCOPE | Vectum has formed an alumni committee to increase the cooperation between current students and alumni. She figured out

most of the problems with the website that was launched at the beginning of the year and found, with the private Facebook group, a good alternative to the previous deleted Facebook Profile in order to share photos and events. So far three issues of the PerVectum have been published, the last one following quickly after the GMA. She also mentioned her pet project of the year, the history of Vectum, and the extra tutorials.

Then Ilina talked us through the financials and explained that she was able to achieve her goal of a small sustained loss. She also mentioned how Vectum returned money to students for the extra tutorials, so as not to make a profit. Afterwards, she gave us a brief overview about all the awesome activities SCOPE | Vectum was able to organise this year. This was rounded up with an amazing social report so that we were all able to reminisce a little bit.

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Maartje, as board of advice, thanked the old board for their hard work and gave some useful advice to the proposed board. Afterwards the new board consisting of Merit, Jeroen, Marie and Lea was initiated.

The Aula was filled with members from SCOPE | Vectum, the other SCOPE associations, the KE-department, alumni and even some members from the LOES.

Afterwards we went to the Ma van Sloun to celebrate the end of this amazing year and the new one coming up. We had the traditional beer races along with a healthy amount of singing and dancing. Everybody had a lot of fun and some members celebrated till the early hours of the morning.

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In the first PerVectum of this acadmemic year we introduced the SCOPE | Vectum commitees. Now nearly a year on we return to see their accomplishments.

PR CommitteeBy the time this issue of the PerVectum is published we will have published four successful issues. It took a lot of work, and a lot of tea and chocolate, but it was worth it to see the finished products. We hope some of our ideas and changes will be kept into the future.

Marijke, Sharon & Katherine

Activties CommitteeWhen you think of a Tuesday night, most of you will probably think about Vectum. We as the activities committee have tried to make every Tuesday night a successful one. A night where everyone enjoys a great activity, great company and of course enough beer in the Ma van Sloun. We have gone out of our way to think of original, fun activities to entertain the Vectum community.

Noah, Marie, Joost, Eric, Ilina & Laura

Ski Trip CommitteeThe Vectum ski trip was a fun and exciting trip for both the complete beginners as well as the hardcore powder hounds. But perhaps the most rewarding part for me was seeing that our hard work and effort towards planning this trip had really paid of as everybody seemed to be enjoying themselves.

Eric, Roderik & Martijn

Committees

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Business Trip CommitteeLooking back at the Business Trip we had a great week with interesting cases at several companies in and around Amsterdam. The companies we visited are Accenture, Districon, AEGON, Flow Traders and IG&H. Besides the company visits, we also had our famous nights in the Gieter which were a lot of fun!

Marijke, Bas, Silas & Martijn

External CommitteeAs the External Affairs Committee of SCOPE | Vectum, our main task was organizing the SCOPE | Vectum Case Day, which took place on April 13th. The participating companies - mainly in the field of actuarial sciences - were Bright Cape Advanced Analytics, Kleynen Consultants and Actuarieel Genootschap - Actuarieel Instituut. On behalf of the whole committee, we would like to thank everyone for their enthusiasm.

Carien, Zohaad, Edwin & Bram

German External Committee In the German External Affairs Committee, we have once again experienced how much effort it takes to establish a market for our association in Germany, due to whatever reason that might be. However, we are happy to announce that we initiated contact with companies with the eye on a Business Trip Germany, that is hopefully going to take place next year. On behalf of the whole committee, we would like to thank everyone for the fantastic year.

Dominik, Christian, Edwin & Bram

Farewell from the SCOPE | Vectum Board 2015-2016

All the things we did this year would not have been possible, without the input of many people and organisations. First of all, we would like to thank all our sponsors. Without them it would

not have been possible to organise all the events we organised this year. Furthermore, we would like to thank the other LOES associations for the great cooperation this year and for the various fun events we had. Moreover, we are also very thankful to the whole SCOPE framework. Despite all the difficult discussions we have had over the year, we feel we have been able to bring the SCOPE framework closer together. We are also very thankful towards the KE department, for the increased cooperation. We would really like to maintain the joint end-of-year drink, but also the general cooperation and support that was set during this year. Additionally, we would like to thank Anke George and Rendy Jansen for all the input they delivered during our CBMs. We would also like to thank Leann Poeth for all her help with alumni and other aspects of SCOPE | Vectum. Of course, SCOPE | Vectum would not have been able to organise all the activities named before, without the input of all our actives from the various committees. Therefore, we would like to thank all of you for the energy and inspiration you brought to Vectum. You made this year very special. Lastly, we would like to thank all our members in general. In the end SCOPE | Vectum would not exist without you, and it was great to see many of you during our activities. We’ve created many memories with you this year that will last us lifetime. We now go our separate ways and leave SCOPE | Vectum in the capable hands of Merit Geldmacher, Jeroen Lamers, Marie Ternes and Lea Bottmer. We wish them the best of luck for next year. We hope to see you all in the not too distant future!