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The use of encompassing tests for forecast combinations

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  • Turgut Kışınbay

Abstract

This paper proposes an algorithm that uses forecast encompassing tests for combining forecasts when there are a large number of forecasts that might enter the combination. The algorithm excludes a forecast from the combination if it is encompassed by another forecast. To assess the usefulness of this approach, an extensive empirical analysis is undertaken using a US macroeconomic dataset. The results are encouraging; the algorithm forecasts outperform benchmark model forecasts, in a mean square error (MSE) sense, in a majority of cases. The paper also compares the empirical performance of different approaches to forecast combination, and provides a rule-of‐thumb cut‐off point for the thick‐modeling approach. Copyright (C) 2009 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1170
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 29 (2010)
Issue (Month): 8 (December)
Pages: 715-727

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Handle: RePEc:jof:jforec:v:29:y:2010:i:8:p:715-727

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

Related research

Keywords: forecast combination ; forecast encompassing ; thick‐modeling ;

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Cited by:
  1. 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.
  2. 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.
  3. Cang, Shuang & Yu, Hongnian, 2014. "A combination selection algorithm on forecasting," European Journal of Operational Research, Elsevier, vol. 234(1), pages 127-139.
  4. Leonardo Morales-Arias & Alexander Dross, 2010. "Adaptive Forecasting of Exchange Rates with Panel Data," Kiel Working Papers 1656, Kiel Institute for the World Economy.
  5. Antonis Michis, 2012. "Monitoring Forecasting Combinations with Semiparametric Regression Models," Working Papers 2012-02, Central Bank of Cyprus.
  6. Morales-Arias, Leonardo & Moura, Guilherme V., 2013. "Adaptive forecasting of exchange rates with panel data," International Journal of Forecasting, Elsevier, vol. 29(3), pages 493-509.
  7. Costantini, Mauro & Pappalardo, Carmine, 2010. "A hierarchical procedure for the combination of forecasts," International Journal of Forecasting, Elsevier, vol. 26(4), pages 725-743, October.

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