Forecast Combination and Model Averaging Using Predictive Measures
AbstractWe extend the standard approach to Bayesian forecast combination by forming the weights for the model averaged forecast from the predictive likelihood rather than the standard marginal likelihood. The use of predictive measures of fit offers greater protection against in-sample overfitting and improves forecast performance. For the predictive likelihood we show analytically that the forecast weights have good large and small sample properties. This is confirmed in a simulation study and an application to forecasts of the Swedish inflation rate where forecast combination using the predictive likelihood outperforms standard Bayesian model averaging using the marginal likelihood.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5268.
Date of creation: Oct 2005
Date of revision:
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Other versions of this item:
- Jana Eklund & Sune Karlsson, 2007. "Forecast Combination and Model Averaging Using Predictive Measures," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(2-4), pages 329-363.
- Eklund, Jana & Karlsson, Sune, 2005. "Forecast Combination and Model Averaging using Predictive Measures," Working Paper Series 191, Sveriges Riksbank (Central Bank of Sweden).
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-09 (All new papers)
- NEP-ETS-2005-12-09 (Econometric Time Series)
- NEP-FOR-2005-12-09 (Forecasting)
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