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Time Series Models for Forecasting: Testing or Combining?

Author

Listed:
  • Chen Zhuo

    (University of Chicago)

  • Yang Yuhong

    (University of Minnesota)

Abstract

In this paper we systematically compare forecasting accuracy of hypothesis testing procedures with that of a model combining algorithm. Testing procedures are commonly used in applications to select a model, based on which forecasts are made. However, besides the well-known difficulty in dealing with multiple tests, the testing approach has a potentially serious drawback: controlling the probability of Type I error at a conventional level (e.g., 0.05) often excessively favors the null, which can be problematic for the purpose of forecasting. In addition, as shown in this paper, testing procedures can be very unstable, which results in high variability in the forecasts.

Suggested Citation

  • Chen Zhuo & Yang Yuhong, 2007. "Time Series Models for Forecasting: Testing or Combining?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 11(1), pages 56-90, March.
    • Handle: RePEc:bpj:sndecm:v:11:y:2007:i:1:n:3
    DOI: 10.2202/1558-3708.1385
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    References listed on IDEAS

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    5. Cheng, Gang & Yang, Yuhong, 2015. "Forecast combination with outlier protection," International Journal of Forecasting, Elsevier, vol. 31(2), pages 223-237.
    6. Sanchez, Ismael, 2006. "Short-term prediction of wind energy production," International Journal of Forecasting, Elsevier, vol. 22(1), pages 43-56.

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