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Combining forecast densities from VARs with uncertain instabilities

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  • Anne-Sofie Jore

    ()
    (Norges Bank (Central Bank of Norway))

  • James Mitchell

    ()
    (National Institute of Economic and Social Research (NIESR))

  • Shaun P. Vahey

    (Norges Bank (Central Bank of Norway) and Reserve Bank of New Zealand)

Abstract

Clark and McCracken (2008) argue that combining real-time point forecasts from VARs of output, prices and interest rates improves point forecast accuracy in the presence of uncertain model instabilities. In this paper, we generalize their approach to consider forecast density combinations and evaluations. Whereas Clark and McCracken (2008) show that the point forecast errors from particular equal-weight pairwise averages are typically comparable or better than benchmark univariate time series models, we show that neither approach produces accurate real-time forecast densities for recent US data. If greater weight is given to models that allow for the shifts in volatilities associated with the Great Moderation, predictive density accuracy improves substantially.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2008/WP-20081/
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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2008/01.

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Length: 26 pages
Date of creation: 24 Jan 2008
Date of revision:
Handle: RePEc:bno:worpap:2008_01

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Keywords: Density forecasts; Uncertainty; Combining forecasts; Evaluating forcasts; VAR models;

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References

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  1. Cees Diks & Valentyn Panchenko & Dick van Dijk, 2008. "Partial Likelihood-Based Scoring Rules for Evaluating Density Forecasts in Tails," Discussion Papers 2008-10, School of Economics, The University of New South Wales.
  2. Garratt, Anthony & Koop, Gary & Mise, Emi & Vahey, Shaun P., 2009. "Real-Time Prediction With U.K. Monetary Aggregates in the Presence of Model Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 480-491.
  3. Eklund, Jana & Karlsson, Sune, 2005. "Forecast Combination and Model Averaging Using Predictive Measures," CEPR Discussion Papers 5268, C.E.P.R. Discussion Papers.
  4. Geweke, John & Whiteman, Charles, 2006. "Bayesian Forecasting," Handbook of Economic Forecasting, Elsevier.
  5. Timmermann, Allan, 2006. "Forecast Combinations," Handbook of Economic Forecasting, Elsevier.
  6. John Geweke & Gianni Amisano, 2008. "Optimal Prediction Pools," Working Paper Series 22-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
  7. Croushore, Dean & Stark, Tom, 2001. "A real-time data set for macroeconomists," Journal of Econometrics, Elsevier, vol. 105(1), pages 111-130, November.
  8. Anthony Garratt & Gary Koop & Shaun P. Vahey, 2006. "Forecasting Substantial Data Revisions in the Presence of Model Uncertainty," Reserve Bank of New Zealand Discussion Paper Series DP2006/02, Reserve Bank of New Zealand.
  9. Andersson, Michael K & Karlsson, Sune, 2007. "Bayesian forecast combination for VAR models," Working Paper Series 216, Sveriges Riksbank (Central Bank of Sweden).
  10. Amisano, Gianni & Giacomini, Raffaella, 2007. "Comparing Density Forecasts via Weighted Likelihood Ratio Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 177-190, April.
  11. Wallis, Kenneth F., 2001. "Chi-squared tests of interval and density forecasts and the Bank of England's fan charts," Working Paper Series 0083, European Central Bank.
  12. Todd E. Clark & Michael W. McCracken, 2007. "Averaging forecasts from VARs with uncertain instabilities," Finance and Economics Discussion Series 2007-42, Board of Governors of the Federal Reserve System (U.S.).
  13. repec:nsr:niesrd:320 is not listed on IDEAS
  14. Valentina Corradi & Andres Fernandez & Norman Swanson, 2008. "Information in the revision process of real-time datasets," Working Papers 08-27, Federal Reserve Bank of Philadelphia.
  15. Corradi, Valentina & Swanson, Norman R., 2006. "Predictive Density Evaluation," Handbook of Economic Forecasting, Elsevier.
  16. Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
  17. James Mitchell & Stephen G. Hall, 2005. "Evaluating, Comparing and Combining Density Forecasts Using the KLIC with an Application to the Bank of England and NIESR 'Fan' Charts of Inflation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 995-1033, December.
  18. Peter A. Morris, 1977. "Combining Expert Judgments: A Bayesian Approach," Management Science, INFORMS, vol. 23(7), pages 679-693, March.
  19. Anne Sofie Jore & James Mitchell & Shaun Vahey, 2008. "Combining Forecast Densities from VARs with Uncertain Instabilities," Reserve Bank of New Zealand Discussion Paper Series DP2008/18, Reserve Bank of New Zealand.
  20. Robert L. Winkler, 1981. "Combining Probability Distributions from Dependent Information Sources," Management Science, INFORMS, vol. 27(4), pages 479-488, April.
  21. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  22. Peter A. Morris, 1974. "Decision Analysis Expert Use," Management Science, INFORMS, vol. 20(9), pages 1233-1241, May.
  23. Michael P. Clements, 2004. "Evaluating the Bank of England Density Forecasts of Inflation," Economic Journal, Royal Economic Society, vol. 114(498), pages 844-866, October.
  24. Kenneth F. Wallis, 2005. "Combining Density and Interval Forecasts: A Modest Proposal," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 983-994, December.
  25. Hall, Stephen G. & Mitchell, James, 2007. "Combining density forecasts," International Journal of Forecasting, Elsevier, vol. 23(1), pages 1-13.
  26. repec:nsr:niesrd:303 is not listed on IDEAS
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