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A hierarchical procedure for the combination of forecasts

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  • Costantini, Mauro
  • Pappalardo, Carmine

Abstract

This paper proposes a strategy to increase the efficiency of forecast combination. Given the availability of a wide range of forecasts for the same variable of interest, our goal is to apply combining methods to a restricted set of models. With this aim, a hierarchical procedure based on an encompassing test is considered. First, forecasting models are ranked according to a measure of predictive accuracy (RMSFE). The models are then selected for combination such that each forecast is not encompassed by any of the competing forecasts. Thus the hierarchical procedure represents a compromise between model selection and model averaging. The robustness of the procedure is investigated in terms of the relative RMSFE using ISAE (Institute for Studies and Economic Analyses) short-term forecasting models for monthly industrial production in Italy.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 26 (2010)
Issue (Month): 4 (October)
Pages: 725-743

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Handle: RePEc:eee:intfor:v:26:y::i:4:p:725-743

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Web page: http://www.elsevier.com/locate/ijforecast

Related research

Keywords: Combining forecasts Econometric models Evaluating forecasts Model selection Time series;

References

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  1. Hans-Martin Krolzig & David Hendry, 1999. "Computer Automation of General-to-Specific Model Selection Procedures," Computing in Economics and Finance 1999 314, Society for Computational Economics.
  2. Rünstler, Gerhard & Sédillot, Franck, 2003. "Short-term estimates of euro area real GDP by means of monthly data," Working Paper Series 0276, European Central Bank.
  3. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521632423, December.
  4. David F. Hendry & Michael P. Clements, 2004. "Pooling of forecasts," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 1-31, 06.
  5. Bodo, Giorgio & Signorini, Luigi Federico, 1987. "Short-term forecasting of the industrial production index," International Journal of Forecasting, Elsevier, vol. 3(2), pages 245-259.
  6. Turgut Kışınbay, 2010. "The use of encompassing tests for forecast combinations," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(8), pages 715-727, December.
  7. Newbold, Paul & Zumwalt, J. Kenton & Kannan, Srinivasan, 1987. "Combining forecasts to improve earnings per share prediction : An examination of electric utilities," International Journal of Forecasting, Elsevier, vol. 3(2), pages 229-238.
  8. 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.
  9. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
  10. Ericsson, Neil R., 1992. "Parameter constancy, mean square forecast errors, and measuring forecast performance: An exposition, extensions, and illustration," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 465-495, August.
  11. Bruno Giancarlo & Lupi Claudio, 2001. "Forecasting Industrial Production and the Early Detection of Turning POints," ISAE Working Papers 20, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  12. Banbura, Marta & Rünstler, Gerhard, 2011. "A look into the factor model black box: Publication lags and the role of hard and soft data in forecasting GDP," International Journal of Forecasting, Elsevier, vol. 27(2), pages 333-346, April.
  13. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 254-59, April.
  14. David Harvey & Paul Newbold, 2000. "Tests for multiple forecast encompassing," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 471-482.
  15. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
  16. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
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Citations

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Cited by:
  1. Robert Lehmann & Klaus Wohlrabe, 2012. "Forecasting GDP at the Regional Level with Many Predictors," CESifo Working Paper Series 3956, CESifo Group Munich.
  2. A. Girardi & R. Golinelli & C. Pappalardo, 2014. "The Role of Indicator Selection in Nowcasting Euro Area GDP in Pseudo Real Time," Working Papers wp919, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Costantini, Mauro & Gunter, Ulrich & Kunst, Robert M., 2012. "Forecast Combination Based on Multiple Encompassing Tests in a Macroeconomic DSGE-VAR System," Economics Series 292, Institute for Advanced Studies.
  4. Drechsel, Katja & Scheufele, Rolf, 2012. "The performance of short-term forecasts of the German economy before and during the 2008/2009 recession," International Journal of Forecasting, Elsevier, vol. 28(2), pages 428-445.
  5. Leonardo Morales-Arias & Alexander Dross, 2010. "Adaptive Forecasting of Exchange Rates with Panel Data," Research Paper Series 285, Quantitative Finance Research Centre, University of Technology, Sydney.
  6. Cang, Shuang & Yu, Hongnian, 2014. "A combination selection algorithm on forecasting," European Journal of Operational Research, Elsevier, vol. 234(1), pages 127-139.

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