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Economic Hypothesis Test on Ideal Inflation Rate
Anuraag Gopaluni
edited Aug 6, 2017
Getting Started Papers Research Statistics Futures

Hi everyone! My name is Anuraag Gopaluni, and I am a rising junior at Boston University really interested in quantitative finance. I'm a part of the quant research team within the BU Finance and Investment Club, and we've been spending time this summer using the awesome resources provided by Quantopian, namely the Quantopian Lecture Series and Research Environment, to both learn about and apply quantitative finance. What I've posted here is a simple economic hypothesis test about inflation; more specifically, I wanted to see if the claim that the ideal inflation rate is 2-3% was valid. Any feedback or critique would be greatly appreciated.

Also, if anyone is curious to see what other hypothesis testing we're doing, check out these other posts:

https://www.quantopian.com/posts/us-unemployment-rate-as-an-indicator-of-stock-market-performance
https://www.quantopian.com/posts/interest-rates-v-market-volatility

4 responses
Delaney Mackenzie
Jul 31, 2017

Hey Anuraag,

Great post. I like how you clearly defined your hypothesis from the get-go. Helps reduce a lot of overfitting. Some interesting things to test would be whether your underlying data are stationary, if they are they can cause weird results in common tests. See here for more:
https://www.quantopian.com/lectures/integration-cointegration-and-stationarity

Also, now that you've established likelihood of a relationship, you could start thinking about where the causation mechanism lies. Is it that returns drive behavior which drives inflation? Does inflation drive returns? Do both things occur in some quantity (my money is here). Also you could look at lagged causation. If you offset one series and look at whether a change in one is followed by a change in the other, that's good evidence that there's causation that direction.

Disclaimer

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

Anuraag Gopaluni
Jul 31, 2017

Hi Delaney,

Thank you so much for your comments. You're right, there are various things than can be done now, namely looking at stationarity and identifying potential lagged causation. It would be interesting indeed to see if a change in one series follows a change in the other. Looking forward to expanding on the hypotheses!

Appreciate the feedback.

Burrito Dan
Jul 31, 2017

I would also look at interest rates and oil prices as independent variables.

Anuraag Gopaluni
Aug 4, 2017

Hi Dan,
Sorry for the late reply, but thanks for your comment! Hmm yes, it would be interesting indeed to look at oil prices and interest rates as independent variables. I would expect there to be an inverse relationship, but whether or not there is one or whether it is statistically significant is something I can definitely explore. Thanks for the idea!

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.