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Time-varying model averaging

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  • Sun, Yuying
  • Hong, Yongmiao
  • Lee, Tae-Hwy
  • Wang, Shouyang
  • Zhang, Xinyu

Abstract

Structural changes often occur in economics and finance due to changes in preferences, technologies, institutional arrangements, policies, crises, etc. Improving forecast accuracy of economic time series with structural changes is a long-standing problem. Model averaging aims at providing an insurance against selecting a poor forecast model. All existing model averaging approaches in the literature are designed with constant (non-time-varying) combination weights. Little attention has been paid to time-varying model averaging, which is more realistic in economics under structural changes. This paper proposes a novel model averaging estimator which selects optimal time-varying combination weights by minimizing a local jackknife criterion. It is shown that the proposed time-varying jackknife model averaging (TVJMA) estimator is asymptotically optimal in the sense of achieving the lowest possible local squared error loss in a class of time-varying model averaging estimators. Under a set of regularity assumptions, the TVJMA estimator is Th-consistent. A simulation study and an empirical application highlight the merits of the proposed TVJMA estimator relative to a variety of popular estimators with constant model averaging weights and model selection.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:econom:v:222:y:2021:i:2:p:974-992
    DOI: 10.1016/j.jeconom.2020.02.006
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    Cited by:

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    8. Yuying Sun & Shaoxin Hong & Zongwu Cai, 2023. "Optimal Local Model Averaging for Divergent-Dimensional Functional-Coefficient Regressions," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202309, University of Kansas, Department of Economics, revised Sep 2023.
    9. Zongwu Cai & Gunawan, 2023. "A Combination Forecast for Nonparametric Models with Structural Breaks," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202310, University of Kansas, Department of Economics, revised Sep 2023.

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    More about this item

    Keywords

    Asymptotic optimality; Forecast combination; Local stationarity; Model averaging; Structural change; Time-varying model averaging;
    All these keywords.

    JEL classification:

    • 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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