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Unpredictability and the Foundations of Economic Forecasting

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  • David F. Hendry

    ()
    (Economics Department, University of Oxford)

Abstract

We revisit the concept of unpredictability to explore its implications for forecasting strategies in a non-stationary world subject to structural breaks, where model and mechanism differ. Six aspects of the role of unpredictability are distinguished, compounding the four additional mistakes most likely in estimated forecasting models. Structural breaks, rather than limited information, are the key problem, exacerbated by conflicting requirements on forecast-error corrections. We consider model transformations and corrections to reduce forecast-error biases, as usual at some cost in increased forecast-error variances. The analysis is illustrated by an empirical application to M1 in the UK.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2004/w15/ForcBasis.pdf
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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2004-W15.

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Length: 30 pages
Date of creation: 06 May 2004
Date of revision:
Handle: RePEc:nuf:econwp:0415

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Web page: http://www.nuff.ox.ac.uk/economics/

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  1. Francis X. Diebold & Jose A. Lopez, 1996. "Forecast Evaluation and Combination," NBER Technical Working Papers 0192, National Bureau of Economic Research, Inc.
  2. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521634809, April.
  3. repec:cup:etheor:v:8:y:1992:i:2:p:188-202 is not listed on IDEAS
  4. Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1996. "Stochastic Volatility: Likelihood Inference And Comparison With Arch Models," Econometrics 9610002, EconWPA.
  5. Johansen, Søren, 1992. "A Representation of Vector Autoregressive Processes Integrated of Order 2," Econometric Theory, Cambridge University Press, vol. 8(02), pages 188-202, June.
  6. Hendry, David F. & Clements, Michael P., 2001. "Economic forecasting: some lessons from recent research," Working Paper Series 0082, European Central Bank.
  7. Melino, Angelo & Turnbull, Stuart M., 1990. "Pricing foreign currency options with stochastic volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 239-265.
  8. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
  9. David F. Hendry & Neil R. Ericsson, 1990. "Modeling the demand for narrow money in the United Kingdom and the United States," International Finance Discussion Papers 383, Board of Governors of the Federal Reserve System (U.S.).
  10. Chevillon, Guillaume & Hendry, David F., 2005. "Non-parametric direct multi-step estimation for forecasting economic processes," International Journal of Forecasting, Elsevier, vol. 21(2), pages 201-218.
  11. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
  12. Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996. "Trend-Stationarity in the I(2) Cointegration Model," Discussion Papers 96-12, University of Copenhagen. Department of Economics.
  13. Paruolo, Paolo, 1996. "On the determination of integration indices in I(2) systems," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 313-356.
  14. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
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Cited by:
  1. Qin, Duo & Cagas, Marie Anne & Ducanes, Geoffrey & Magtibay-Ramos, Nedelyn & Quising, Pilipinas, 2008. "Automatic leading indicators versus macroeconometric structural models: A comparison of inflation and GDP growth forecasting," International Journal of Forecasting, Elsevier, vol. 24(3), pages 399-413.
  2. Hendry, David F & Hubrich, Kirstin, 2006. "Forecasting Economic Aggregates by Disaggregates," CEPR Discussion Papers 5485, C.E.P.R. Discussion Papers.
  3. Kirstin Hubrich & David F. Hendry, 2005. "Forecasting Aggregates by Disaggregates," Computing in Economics and Finance 2005 270, Society for Computational Economics.

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