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Forecast Combination Based on Multiple Encompassing Tests in a Macroeconomic DSGE System

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Author Info

  • Costantini, Mauro

    (Department of Economics, University of Vienna, Vienna, Austria)

  • Gunter, Ulrich

    (Department of Economics, University of Vienna, Vienna, Austria)

  • Kunst, Robert M.

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria and Department of Economics, University of Vienna, Vienna, Austria)

Abstract

We use data generated by a macroeconomic DSGE model to study the relative benefits of forecast combinations based on forecast-encompassing tests relative to simple uniformly weighted forecast averages across rival models. Assumed rival models are four linear autoregressive specifications, one of them a more sophisticated factor-augmented vector autoregression (FAVAR). The forecaster is assumed not to know the true data-generating DSGE model. The results critically depend on the prediction horizon. While one-step prediction hardly supports test-based combinations, the test-based procedure attains a clear lead at prediction horizons greater than two.

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File URL: http://www.ihs.ac.at/publications/eco/es-251.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 251.

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Length: 19 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:ihs:ihsesp:251

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Related research

Keywords: Combining forecasts; encompassing tests; model selection; time series; DSGE model;

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