Advanced Search
MyIDEAS: Login

Optimal forecast combinations under general loss functions and forecast error distributions

Contents:

Author Info

  • Elliott, Graham
  • Timmermann, Allan

Abstract

Existing results on the properties and performance of forecast combinations have been derived in the context of mean squared error loss. Under this loss function empirical studies have generally found that estimates of optimal forecast combination weights lead to higher losses than equally-weighted combined forecasts which in turn outperform the best individual predictions. We show that this and other results can be overturned when asymmetries are introduced in the loss function and the forecast error distribution is skewed. We characterize the optimal combination weights for the most commonly used alternatives to mean squared error loss and demonstrate how the degree of asymmetry in the loss function and skews in the underlying forecast error distribution can significantly change the optimal combination weights. We also propose estimation methods and investigate their small sample properties in simulations and in an inflation forecasting exercise.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VC0-4BY3YYV-1/2/31edb81e99f0c28e994eef2e10e22eca
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 122 (2004)
Issue (Month): 1 (September)
Pages: 47-79

as in new window
Handle: RePEc:eee:econom:v:122:y:2004:i:1:p:47-79

Contact details of provider:
Web page: http://www.elsevier.com/locate/jeconom

Related research

Keywords:

Other versions of this item:

References

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.:
as in new window
  1. Allan Timmermann & Gabriel Perez-Quiros, 2000. "Business Cycle Asymmetries in Stock Returns: Evidence from Higher Order Moments and Conditional Densities," FMG Discussion Papers dp360, Financial Markets Group.
  2. Kenneth D. West & Hali J. Edison & Dongchul Cho, 1993. "A utility based comparison of some models of exchange rate volatility," International Finance Discussion Papers 441, Board of Governors of the Federal Reserve System (U.S.).
  3. Newey, Whitney K & Powell, James L, 1987. "Asymmetric Least Squares Estimation and Testing," Econometrica, Econometric Society, vol. 55(4), pages 819-47, July.
  4. Francis X. Diebold & Jose A. Lopez, 1995. "Forecast evaluation and combination," Research Paper 9525, Federal Reserve Bank of New York.
  5. Marcellino, Massimiliano, 2002. "Forecast Pooling for Short Time Series of Macroeconomic Variables," CEPR Discussion Papers 3313, C.E.P.R. Discussion Papers.
  6. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  7. A. Robert Nobay & David A. Peel, 1998. "Optimal Monetary Policy in a Model of Asymmetric Central Bank Preferences," FMG Discussion Papers dp306, Financial Markets Group.
  8. Weiss, Andrew A, 1996. "Estimating Time Series Models Using the Relevant Cost Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 539-60, Sept.-Oct.
  9. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  10. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
  11. Clive W.J. Granger, 1999. "Outline of forecast theory using generalized cost functions," Spanish Economic Review, Springer, vol. 1(2), pages 161-173.
  12. Yeung Lewis Chan & James H. Stock & Mark W. Watson, 1999. "A dynamic factor model framework for forecast combination," Spanish Economic Review, Springer, vol. 1(2), pages 91-121.
  13. Diebold, Francis X, 1988. "Serial Correlation and the Combination of Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(1), pages 105-11, January.
  14. David Laster & Paul Bennett & In Sun Geoum, 1999. "Rational Bias In Macroeconomic Forecasts," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 293-318, February.
  15. Min, C.K. & Zellner, A., 1992. ""Bayesian and Non-Bayesian Methods for Combining Models and Forecasts with Applications to Forecasting International Growth Rates"," Papers 90-92-23, California Irvine - School of Social Sciences.
  16. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  17. Anthony Tay & Kenneth F. Wallis, 2000. "Density Forecasting: A Survey," Econometric Society World Congress 2000 Contributed Papers 0370, Econometric Society.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:econom:v:122:y:2004:i:1:p:47-79. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.