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Assessing Forecast Uncertainties in a VECX Model for Switzerland: An Exercise in Forecast Combination across Models and Observation Windows

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  • Katrin Assenmacher-Wesche
  • M. Hashem Pesaran

Abstract

We investigate the effect of forecast uncertainty in a cointegrating vector error correction model for Switzerland. Forecast uncertainty is evaluated in three different dimensions. First, we investigate the effect on forecasting performance of averaging over forecasts from different models. Second, we look at different estimation windows. We find that averaging over estimation windows is at least as effective as averaging over different models and both complement each other. Third, we explore whether using weighting schemes from the machine learning literature improves the average forecast. Compared to equal weights the effect of the weighting scheme on forecast accuracy is small in our application.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-10/cesifo1_wp2116.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2116.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2116

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Keywords: Bayesian model averaging; choice of observation window; long-run structural vector autoregression;

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  1. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2006. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199296859, October.
  2. Pesaran, M.H. & Pettenuzzo, D. & Timmermann, A., 2004. "‘Forecasting Time Series Subject to Multiple Structural Breaks’," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0433, Faculty of Economics, University of Cambridge.
  3. Katrin Assenmacher-Wesche & M. Hashem Pesaran, 2008. "A VECX Model of the Swiss Economy," CESifo Working Paper Series 2281, CESifo Group Munich.
  4. Garratt A. & Lee K. & Pesaran M.H. & Shin Y., 2003. "Forecast Uncertainties in Macroeconomic Modeling: An Application to the U.K. Economy," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 98, pages 829-838, January.
  5. Garratt, A. & Lee, K. & Pesaran, M. H. & Shin, Y., 1998. "A Long-run Structural Macro-econometric Model of the UK," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9812, Faculty of Economics, University of Cambridge.
  6. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2004. "Exploring the International Linkages of the Euro Area: A Global VAR Analysis," IEPR Working Papers, Institute of Economic Policy Research (IEPR) 04.6, Institute of Economic Policy Research (IEPR).
  7. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 813-36, July.
  8. Geweke, John & Whiteman, Charles, 2006. "Bayesian Forecasting," Handbook of Economic Forecasting, Elsevier, Elsevier.
  9. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521632423.
  10. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  11. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, Elsevier, vol. 97(2), pages 293-343, August.
  12. Deschamps, Philippe J., 2007. "Comparing smooth transition and Markov switching autoregressive models of US Unemployment," DQE Working Papers, Department of Quantitative Economics, University of Freiburg/Fribourg Switzerland 7, Department of Quantitative Economics, University of Freiburg/Fribourg Switzerland, revised 04 Jun 2008.
  13. Clements, Michael P. & Hendry, David F., 2006. "Forecasting with Breaks," Handbook of Economic Forecasting, Elsevier, Elsevier.
  14. M. Hashem Pesaran & Christoph Schleicher & Paolo Zaffaroni, 2008. "Model Averaging in Risk Management with an Application to Futures Markets," CESifo Working Paper Series 2231, CESifo Group Munich.
  15. Sancetta, A., 2007. "Online Forecast Combination for Dependent Heterogeneous Data," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0718, Faculty of Economics, University of Cambridge.
  16. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262531895, December.
  17. Pesaran, M. Hashem & Timmermann, Allan, 2007. "Selection of estimation window in the presence of breaks," Journal of Econometrics, Elsevier, Elsevier, vol. 137(1), pages 134-161, March.
  18. Kilian, Lutz, 2001. "Impulse Response Analysis in Vector Autoregressions with Unknown Lag Order," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 20(3), pages 161-79, April.
  19. Yang, Yuhong, 2004. "Combining Forecasting Procedures: Some Theoretical Results," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 20(01), pages 176-222, February.
  20. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, Elsevier, vol. 13(2), pages 281-291, June.
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