This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Improving forecast accuracy by combining recursive and rolling forecasts

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Todd E. Clark
Michael W. McCracken

Additional information is available for the following registered author(s):

Abstract

This paper presents analytical, Monte Carlo, and empirical evidence on the effectiveness of combining recursive and rolling forecasts when linear predictive models are subject to structural change. We first provide a characterization of the bias-variance tradeoff faced when choosing between either the recursive and rolling schemes or a scalar convex combination of the two. From that, we derive pointwise optimal, time-varying and data-dependent observation windows and combining weights designed to minimize mean square forecast error. We then proceed to consider other methods of forecast combination, including Bayesian methods that shrink the rolling forecast to the recursive and Bayesian model averaging. Monte Carlo experiments and several empirical examples indicate that although the recursive scheme is often difficult to beat, when gains can be obtained, some form of shrinkage can often provide improvements in forecast accuracy relative to forecasts made using the recursive scheme or the rolling scheme with a fixed window width.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.kansascityfed.org/Publicat/Reswkpap/pdf/RWP04-10.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 04-10.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: 2004
Date of revision:
Handle: RePEc:fip:fedkrw:rwp04-10

Contact details of provider:
Postal: 925 GRAND BOULEVARD, KANSAS CITY, MISSOURI 64198-0001
Phone: (816) 881-2683
Web page: http://www.kansascityfed.org/
More information through EDIRC

Order Information:
Email:
Web: http://app.ny.frb.org/cfpicnic/frame1.cfm

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Forecasting

Other versions of this item:

This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November. [Downloadable!] (restricted)
  2. Clarida, Richard H. & Sarno, Lucio & Taylor, Mark P. & Valente, Giorgio, 2003. "The out-of-sample success of term structure models as exchange rate predictors: a step beyond," Journal of International Economics, Elsevier, vol. 60(1), pages 61-83, May. [Downloadable!] (restricted)
    Other versions:
  3. Gary Koop & Simon Potter, 2003. "Forecasting in Large Macroeconomic Panels using Bayesian Model Averaging," Discussion Papers in Economics 04/16, Department of Economics, University of Leicester. [Downloadable!]
    Other versions:
  4. Pesaran, M. Hashem & Timmermann, Allan, 2002. "Market timing and return prediction under model instability," Journal of Empirical Finance, Elsevier, vol. 9(5), pages 495-510, December. [Downloadable!] (restricted)
    Other versions:
  5. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. 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. [Downloadable!]
  7. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-76, June. [Downloadable!] (restricted)
    Other versions:
  8. Terui, Nobuhiko & van Dijk, Herman K., 2002. "Combined forecasts from linear and nonlinear time series models," International Journal of Forecasting, Elsevier, vol. 18(3), pages 421-438. [Downloadable!] (restricted)
    Other versions:
  9. Raffaella Giacomini & Halbert White, 2003. "Tests of Conditional Predictive Ability," Econometrics 0308001, EconWPA. [Downloadable!]
    Other versions:
  10. Elliott, Graham & Timmermann, Allan, 2004. "Optimal forecast combinations under general loss functions and forecast error distributions," Journal of Econometrics, Elsevier, vol. 122(1), pages 47-79, September. [Downloadable!] (restricted)
    Other versions:
  11. Rossi, Barbara & Inoue, Atsushi, 2003. "Recursive Predictability Tests for Real-Time Data," Working Papers 03-24, Duke University, Department of Economics. [Downloadable!]
    Other versions:
  12. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October. [Downloadable!] (restricted)
    Other versions:
  13. Min, Chung-ki & Zellner, Arnold, 1993. "Bayesian and non-Bayesian methods for combining models and forecasts with applications to forecasting international growth rates," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 89-118, March. [Downloadable!] (restricted)
    Other versions:
  14. James H. Stock & Mark W. Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
    Other versions:
  15. Edgerton, David & Wells, Curt, 1994. "Critical Values for the Cusumsq Statistic in Medium and Large Sized Samples," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(3), pages 355-65, August.
  16. Cho, In-Koo & Williams, Noah & Sargent, Thomas J, 2002. "Escaping Nash Inflation," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 1-40, January.
    Other versions:
  17. John M. Maheu & Stephen Gordon, 2004. "Learning, Forecasting and Structural Breaks," Cahiers de recherche 0422, CIRPEE. [Downloadable!]
    Other versions:
  18. Bradley S. Paye & Allan Timmermann, 2002. "How stable are Financial Prediction Models? Evidence from US and International Stock Market Data," University of California at San Diego, Economics Working Paper Series 2002-13, Department of Economics, UC San Diego. [Downloadable!]
  19. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22. [Downloadable!]
    Other versions:
  20. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
    Other versions:
  21. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
  22. Richard H. Clarida & Mark P. Taylor, 1997. "The Term Structure Of Forward Exchange Premiums And The Forecastability Of Spot Exchange Rates: Correcting The Errors," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 353-361, August. [Downloadable!] (restricted)
  23. Athanasios Orphanides & Simon van Norden, 2003. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CIRANO Working Papers 2003s-01, CIRANO. [Downloadable!]
    Other versions:
  24. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
    Other versions:
  25. Robert F. Engle & Aaron D. Smith, 1999. "Stochastic Permanent Breaks," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 553-574, November. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pesaran, M.H. & Pick, A., 2008. "Forecasting Random Walks Under Drift Instability," Cambridge Working Papers in Economics 0814, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  2. Craig S. Hakkio, 2008. "PCE and CPI inflation differentials: converting inflation forecasts," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 51-68. [Downloadable!]
  3. Todd E. Clark & Kenneth D. West, 2005. "Using Out-of-Sample Mean Squared Prediction Errors to Test the Martingale Difference," NBER Technical Working Papers 0305, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Calista Cheung & Frédérick Demers, 2007. "Evaluating Forecasts from Factor Models for Canadian GDP Growth and Core Inflation," Working Papers 07-8, Bank of Canada. [Downloadable!]
  5. Todd E. Clark & Michael W. McCracken, 2006. "Averaging forecasts from VARs with uncertain instabilities," Research Working Paper RWP 06-12, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  6. Todd E. Clark & Michael W. McCracken, 2006. "Forecasting of small macroeconomic VARs in the presence of instabilities," Research Working Paper RWP 06-09, Federal Reserve Bank of Kansas City. [Downloadable!]
Statistics
Access and download statistics

Did you know? You too can volunteer for RePEc, for example by providing information about publications in your institution.

This page was last updated on 2008-9-27.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.