Forecasting macroeconomic time series with locally adaptive signal extraction
AbstractWe introduce a non-Gaussian dynamic mixture model for macroeconomic forecasting. The locally adaptive signal extraction and regression (LASER) model is designed to capture relatively persistent AR processes (signal) which are contaminated by high frequency noise. The distributions of the innovations in both noise and signal are modeled robustly using mixtures of normals. The mean of the process and the variances of the signal and noise are allowed to shift either suddenly or gradually at unknown locations and unknown numbers of times. The model is then capable of capturing movements in the mean and conditional variance of a series, as well as in the signal-to-noise ratio. Four versions of the model are estimated by Bayesian methods and used to forecast a total of nine quarterly macroeconomic series from the US, Sweden and Australia. We observe that allowing for infrequent and large parameter shifts while imposing normal and homoskedastic errors often leads to erratic forecasts, but that the model typically forecasts well if it is made more robust by allowing for non-normal errors and time varying variances. Our main finding is that, for the nine series we analyze, specifications with infrequent and large shifts in error variances outperform both fixed parameter specifications and smooth, continuous shifts when it comes to interval coverage.
Download InfoIf 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.
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 InfoArticle provided by Elsevier in its journal International Journal of Forecasting.
Volume (Year): 26 (2010)
Issue (Month): 2 (April)
Contact details of provider:
Web page: http://www.elsevier.com/locate/ijforecast
Bayesian inference Forecast evaluation Regime switching State space modeling Dynamic mixture models;
Other versions of this item:
- Giordani, Paolo & Villani, Mattias, 2009. "Forecasting Macroeconomic Time Series With Locally Adaptive Signal Extraction," Working Paper Series 234, Sveriges Riksbank (Central Bank of Sweden).
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
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.:
- Stock, James H & Watson, Mark W, 1996.
"Evidence on Structural Instability in Macroeconomic Time Series Relations,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 14(1), pages 11-30, January.
- James H. Stock & Mark W. Watson, 1994. "Evidence on Structural Instability in Macroeconomic Time Series Relations," NBER Technical Working Papers 0164, National Bureau of Economic Research, Inc.
- James H. Stock & Mark W. Watson, 1994. "Evidence on structural instability in macroeconomic times series relations," Working Paper Series, Macroeconomic Issues 94-13, Federal Reserve Bank of Chicago.
- Gary Koop & Simon M. Potter, 2004.
"Prior Elicitation in Multiple Change-point Models,"
Discussion Papers in Economics
04/26, Department of Economics, University of Leicester.
- Gary M. Koop & Simon M. Potter, 2004. "Prior elicitation in multiple change-point models," Staff Reports 197, Federal Reserve Bank of New York.
- Gary Koop & Simon M. Potter, 2007. "Prior Elicitation in Multiple Change-point Models," Working Paper Series 17-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
- James H. Stock & Mark W. Watson, 2007.
"Why Has U.S. Inflation Become Harder to Forecast?,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
- Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Bessec Marie & Bouabdallah Othman, 2005.
"What Causes The Forecasting Failure of Markov-Switching Models? A Monte Carlo Study,"
Studies in Nonlinear Dynamics & Econometrics,
De Gruyter, vol. 9(2), pages 1-24, June.
- Marie Bessec & Othman Bouabdallah, 2005. "What causes the forecasting failure of Markov-Switching models? A Monte Carlo study," Econometrics 0503018, EconWPA.
- Clive W.J. Granger & Namwon Hyung, 2013.
"Occasional Structural Breaks and Long Memory,"
Annals of Economics and Finance,
Society for AEF, vol. 14(2), pages 739-764, November.
- Granger, Clive W.J. & Hyung, Namwon, 1999. "Occasional Structural Breaks and Long Memory," University of California at San Diego, Economics Working Paper Series qt4d60t4jh, Department of Economics, UC San Diego.
- Giordani, Paolo & Kohn, Robert, 2008.
"Efficient Bayesian Inference for Multiple Change-Point and Mixture Innovation Models,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 26, pages 66-77, January.
- Giordani, Paolo & Kohn, Robert, 2006. "Efficient Bayesian Inference for Multiple Change-Point and Mixture Innovation Models," Working Paper Series 196, Sveriges Riksbank (Central Bank of Sweden).
- Chib, Siddhartha, 1998. "Estimation and comparison of multiple change-point models," Journal of Econometrics, Elsevier, vol. 86(2), pages 221-241, June.
- Luiz Renato Regis de Oliveira Lima & Wagner Piazza Gaglianone, 2012. "Constructing Optimal Density Forecasts from Point Forecast Combinations," SÃ©rie Textos para DiscussÃ£o (Working Papers) 5, Programa de Pós-Graduação em Economia - PPGE, Universidade Federal da Paraíba.
- Liu, Yuelin & Morley, James, 2014.
"Structural evolution of the postwar U.S. economy,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 42(C), pages 50-68.
- Yuelin Liu & James Morley, 2013. "Structural Evolution of the Postwar U.S. Economy," Discussion Papers 2013-15, School of Economics, The University of New South Wales.
- Yuelin Liu & James Morley, 2013. "Structural Evolution of the Postwar U.S. Economy," Discussion Papers 2013-15A, School of Economics, The University of New South Wales.
- Todd E. Clark & Francesco Ravazzolo, 2012.
"The macroeconomic forecasting performance of autoregressive models with alternative specifications of time-varying volatility,"
1218, Federal Reserve Bank of Cleveland.
- Todd E. Clark & Francesco Ravazzolo, 2012. "The macroeconomic forecasting performance of autoregressive models with alternative specifications of time-varying volatility," Working Paper 2012/09, Norges Bank.
- Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2012.
"Real-time nowcasting with a Bayesian mixed frequency model with stochastic volatility,"
1227, Federal Reserve Bank of Cleveland.
- Carriero, Andrea & Clark, Todd & Marcellino, Massimiliano, 2013. "Real-Time Nowcasting with a Bayesian Mixed Frequency Model with Stochastic Volatility," CEPR Discussion Papers 9312, C.E.P.R. Discussion Papers.
- Bulkley, George & Giordani, Paolo, 2011. "Structural breaks, parameter uncertainty, and term structure puzzles," Journal of Financial Economics, Elsevier, vol. 102(1), pages 222-232, October.
- Garratt, Anthony & Mise, Emi, 2014. "Forecasting exchange rates using panel model and model averaging," Economic Modelling, Elsevier, vol. 37(C), pages 32-40.
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.