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Understanding models' forecasting performance

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  • Rossi, Barbara
  • Sekhposyan, Tatevik

Abstract

We propose a new methodology to identify the sources of models' forecasting performance. The methodology decomposes the models' forecasting performance into asymptotically uncorrelated components that measure instabilities in the forecasting performance, predictive content, and over-fitting. The empirical application shows the usefulness of the new methodology for understanding the causes of the poor forecasting ability of economic models for exchange rate determination.

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  • Rossi, Barbara & Sekhposyan, Tatevik, 2011. "Understanding models' forecasting performance," Journal of Econometrics, Elsevier, vol. 164(1), pages 158-172, September.
    • Handle: RePEc:eee:econom:v:164:y:2011:i:1:p:158-172
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    Cited by:

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    2. Aaron J. Amburgey & Michael W. McCracken, 2023. "On the real‐time predictive content of financial condition indices for growth," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(2), pages 137-163, March.
    3. Byrne, Joseph P. & Korobilis, Dimitris & Ribeiro, Pinho J., 2016. "Exchange rate predictability in a changing world," Journal of International Money and Finance, Elsevier, vol. 62(C), pages 1-24.
    4. Barbara Rossi, 2013. "Exchange Rate Predictability," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1063-1119, December.
    5. Raheem, Ibrahim & Vo, Xuan Vinh, 2020. "A new approach to exchange rate forecast: The role of global financial cycle and time-varying parameters," MPRA Paper 105359, University Library of Munich, Germany.
    6. Barbara Rossi & Atsushi Inoue, 2012. "Out-of-Sample Forecast Tests Robust to the Choice of Window Size," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(3), pages 432-453, April.
    7. Sune Karlsson & Pär Österholm, 2020. "A note on the stability of the Swedish Phillips curve," Empirical Economics, Springer, vol. 59(6), pages 2573-2612, December.
    8. Sun, Yuying & Hong, Yongmiao & Lee, Tae-Hwy & Wang, Shouyang & Zhang, Xinyu, 2021. "Time-varying model averaging," Journal of Econometrics, Elsevier, vol. 222(2), pages 974-992.
    9. Joseph P. Byrne & Dimitris Korobilis & Pinho J. Ribeiro, 2018. "On The Sources Of Uncertainty In Exchange Rate Predictability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(1), pages 329-357, February.
    10. Liu, Xiaochun, 2015. "Modeling time-varying skewness via decomposition for out-of-sample forecast," International Journal of Forecasting, Elsevier, vol. 31(2), pages 296-311.
    11. Feng, Wenjun & Zhang, Zhengjun, 2023. "Currency exchange rate predictability: The new power of Bitcoin prices," Journal of International Money and Finance, Elsevier, vol. 132(C).
    12. Chao, Shih-Wei, 2016. "Do economic variables improve bond return volatility forecasts?," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 10-26.
    13. Bloem da Silveira Junior, Luiz A. & Vasconcellos, Eduardo & Vasconcellos Guedes, Liliana & Guedes, Luis Fernando A. & Costa, Renato Machado, 2018. "Technology roadmapping: A methodological proposition to refine Delphi results," Technological Forecasting and Social Change, Elsevier, vol. 126(C), pages 194-206.
    14. Rossi, Barbara, 2013. "Advances in Forecasting under Instability," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 1203-1324, Elsevier.
    15. Edvinsson, Rodney & Karlsson, Sune & Österholm, Pär, 2023. "Does Money Growth Predict Inflation? Evidence from Vector Autoregressions Using Four Centuries of Data," Working Papers 2023:3, Örebro University, School of Business.
    16. Rachidi Kotchoni & Maxime Leroux & Dalibor Stevanovic, 2019. "Macroeconomic forecast accuracy in a data‐rich environment," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(7), pages 1050-1072, November.
    17. Ibrahim D. Raheem & Xuan Vinh Vo, 2022. "A new approach to exchange rate forecast: The role of global financial cycle and time‐varying parameters," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 2836-2848, July.
    18. Breen, John David & Hu, Liang, 2021. "The predictive content of oil price and volatility: New evidence on exchange rate forecasting," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    19. Byrne, Joseph P. & Korobilis, Dimitris & Ribeiro, Pinho J., 2014. "On the Sources of Uncertainty in Exchange Rate Predictability," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-24, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    20. Demetrescu, Matei & Rodrigues, Paulo M.M. & Taylor, A.M. Robert, 2023. "Transformed regression-based long-horizon predictability tests," Journal of Econometrics, Elsevier, vol. 237(2).
    21. Liu, Xiaochun, 2019. "On tail fatness of macroeconomic dynamics," Journal of Macroeconomics, Elsevier, vol. 62(C).
    22. Eicher, Theo S. & Rollinson, Yuan Gao, 2023. "The accuracy of IMF crises nowcasts," International Journal of Forecasting, Elsevier, vol. 39(1), pages 431-449.
    23. Norman R. Swanson & Weiqi Xiong & Xiye Yang, 2020. "Predicting interest rates using shrinkage methods, real‐time diffusion indexes, and model combinations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(5), pages 587-613, August.
    24. Ghandar, Adam & Michalewicz, Zbigniew & Zurbruegg, Ralf, 2016. "The relationship between model complexity and forecasting performance for computer intelligence optimization in finance," International Journal of Forecasting, Elsevier, vol. 32(3), pages 598-613.
    25. Wang, Yudong & Ma, Feng & Wei, Yu & Wu, Chongfeng, 2016. "Forecasting realized volatility in a changing world: A dynamic model averaging approach," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 136-149.

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    More about this item

    Keywords

    Forecasting Forecast evaluation Instabilities Over-fitting Exchange rates;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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