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If Nonlinear Models Cannot Forecast, What Use Are They?

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Author Info
James Ramsey (New York University)
Abstract

This paper begins with a brief review of the recent experience using nonlinear models and ideas of chaos to model economic data and to provide forecasts that are better than linear models. The record of improvement is at best meager. The remainder of the paper examines some of the reasons for this lack of improvement. The concepts of "openness" and "isolation" are introduced, and a case is made that open and nonisolated systems cannot be forecasted; the extent to which economic systems are closed and isolated provides the true pragmatic limits to forecastability. The reasons why local "overfitting," especially with nonparametric models, leads to worse forecasts are discussed. Models and "representations" of data are distinguished and the reliance on minimum mean-square forecast error to choose between models and representations is evaluated.

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Article provided by Berkeley Electronic Press in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 1 (1996)
Issue (Month): 2 ()
Pages: 65-86
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Handle: RePEc:bep:sndecm:1:1996:2:65-86

Note: oai:bepress:snde-1013
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ramsey, J.B. & Sayers, C.L. & Rothman, P., 1988. "The Statistical Properties Of Dimension Calculations Using Small Data Sets: Some Economic Applications," Papers 15, Houston - Department of Economics.
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  2. Osborn, Denise R., 1991. "The implications of periodically varying coefficients for seasonal time-series processes," Journal of Econometrics, Elsevier, vol. 48(3), pages 373-384, June. [Downloadable!] (restricted)
  3. Meese, Richard A & Rose, Andrew K, 1991. "An Empirical Assessment of Non-linearities in Models of Exchange Rate Determination," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 603-19, May. [Downloadable!] (restricted)
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  4. Ramsey, James B. & Zhang, Zhifeng, 1995. "The Analysis of Foreign Exchange Data Using Waveform Dictionaries," Working Papers 95-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  5. McCurdy, Thomas H. & Stengos, Thanasis, 1992. "A comparison of risk-premium forecasts implied by parametric versus nonparametric conditional mean estimators," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 225-244. [Downloadable!] (restricted)
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  6. Ghysels, E. & Guay, A. & Hall, A., 1995. "Predictive Tests for Structural Change with Unknown Breakpoint," Cahiers de recherche 9524, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  7. Stock, James H & Watson, Mark W, 1988. "Variable Trends in Economic Time Series," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 147-74, Summer. [Downloadable!] (restricted)
  8. Granger, Clive W J, 1991. " Developments in the Nonlinear Analysis of Economic Series," Scandinavian Journal of Economics, Blackwell Publishing, vol. 93(2), pages 263-76.
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  9. Ashley, Richard A & Patterson, Douglas M, 1989. "Linear versus Nonlinear Macroeconomies: A Statistical Test," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 685-704, August. [Downloadable!] (restricted)
  10. Diebold, Francis X. & Nason, James A., 1990. "Nonparametric exchange rate prediction?," Journal of International Economics, Elsevier, vol. 28(3-4), pages 315-332, May. [Downloadable!] (restricted)
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  11. Dacorogna, Michael M. & Muller, Ulrich A. & Nagler, Robert J. & Olsen, Richard B. & Pictet, Olivier V., 1993. "A geographical model for the daily and weekly seasonal volatility in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 12(4), pages 413-438, August. [Downloadable!] (restricted)
  12. Mizrach, B, 1992. "Multivariate Nearest-Neighbor Forecasts of EMS Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S151-63, Suppl. De. [Downloadable!] (restricted)
  13. Philip Rothman, . "Forecasting Asymmetric Unemployment Rates," Working Papers 9618, East Carolina University, Department of Economics.
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  14. Ramsey, J.B. & Rothman, P., 1993. "Time Irreversibility and Business Cycle Asymmetry," Working Papers 93-39, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  15. Makridakis, Spyros, 1986. "The art and science of forecasting An assessment and future directions," International Journal of Forecasting, Elsevier, vol. 2(1), pages 15-39. [Downloadable!] (restricted)
  16. Poole, William, 1988. "Monetary Policy Lessons of Recent Inflation and Disinflation," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 73-100, Summer. [Downloadable!] (restricted)
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  17. repec:fth:guelph:1991-4 is not listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael Boldin, 1999. "Should Policy Makers Worry about Asymmetries in the Business Cycle?," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 3(4), pages 203-220. [Downloadable!] (restricted)
  2. Kian-Ping Lim & Melvin J. Hinich, 2005. "Cross-temporal universality of non-linear dependencies in Asian stock markets," Economics Bulletin, Economics Bulletin, vol. 7(1), pages 1-6. [Downloadable!]
  3. Costas Milas & Jesus Otero & Theodore Panagiotidis, 2001. "Forecasting the spot prices of various coffee types using linear and non-linear error correction models," BORRADORES DE INVESTIGACIÓN 002737, UNIVERSIDAD DEL ROSARIO - FACULTAD DE ECONOMÍA. [Downloadable!]
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  4. James Ramsey, 2002. "Wavelets in Economics and Finance: Past and Future," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 6(3), pages 1090-1090. [Downloadable!] (restricted)
  5. Teräsvirta, Timo, 2005. "Forecasting economic variables with nonlinear models," Working Paper Series in Economics and Finance 598, Stockholm School of Economics, revised 29 Dec 2005. [Downloadable!]
    Other versions:
  6. Ramsey, J.B., 2002. "Wavelets in Economics and Finance: Past and Future," Working Papers 02-02, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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