Optimizing Time-series Forecasts for Inflation and Interest Rates Using Simulation and Model Averaging
AbstractMotivated by economic-theory concepts—the Fisher hypothesis and the theory of the term structure—we consider a small set of simple bivariate closed-loop time-series models for the prediction of price inflation and of long- and short-term interest rates. The set includes vector autoregressions (VAR) in levels and in differences, a cointegrated VAR, and a non-linear VAR with threshold cointegration based on data from Germany, Japan, UK, and the U.S. Following a traditional comparative evaluation of predictive accuracy, we subject all structures to a mutual validation using parametric bootstrapping. Ultimately, we utilize the recently developed technique of Mallows model averaging to explore the potential of improving upon the predictions through combinations. While the simulations confirm the traded wisdom that VARs in differences optimize one-step prediction and that error correction helps at larger horizons, the model-averaging experiments point at problems in allotting an adequate penalty for the complexity of candidate models.
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Bibliographic InfoPaper provided by Institute for Advanced Studies in its series Economics Series with number 231.
Length: 25 pages
Date of creation: Nov 2008
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Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-01 (All new papers)
- NEP-CBA-2008-12-01 (Central Banking)
- NEP-ECM-2008-12-01 (Econometrics)
- NEP-ETS-2008-12-01 (Econometric Time Series)
- NEP-FOR-2008-12-01 (Forecasting)
- NEP-MAC-2008-12-01 (Macroeconomics)
- NEP-MON-2008-12-01 (Monetary Economics)
- NEP-ORE-2008-12-01 (Operations Research)
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