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Unpredictability in Economic Analysis, Econometric Modeling and Forecasting

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  • David Hendry
  • Grayham E. Mizon

Abstract

Unpredictability arises from intrinsic stochastic variation, unexpected instances of outliers, and unanticipated extrinsic shifts of distributions.� We analyze their properties, relationships, and different effects on the three arenas in the title, which suggests considering three associated information sets.� The implications of unanticipated shifts for forecasting, economic analyses of efficient markets, conditional expectations, and inter-temporal derivations are described.� The potential success of general-to-specific model selection in tackling location shifts by impulse-indicator saturation is contrasted with the major difficulties confronting forecasting.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2013-W04.

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Date of creation: 14 Mar 2013
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Handle: RePEc:oxf:wpaper:2013-w04

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Keywords: Unpredictability; 'Black Swans'; distributional shifts; forecast failure; model selection; conditional expectations;

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  1. Castle Jennifer L. & Doornik Jurgen A & Hendry David F., 2011. "Evaluating Automatic Model Selection," Journal of Time Series Econometrics, De Gruyter, De Gruyter, vol. 3(1), pages 1-33, February.
  2. David Hendry & Søren Johansen & Carlos Santos, 2008. "Automatic selection of indicators in a fully saturated regression," Computational Statistics, Springer, Springer, vol. 23(2), pages 337-339, April.
  3. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 113-44, January.
  4. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  5. Hendry David F & Mizon Grayham E, 2011. "Econometric Modelling of Time Series with Outlying Observations," Journal of Time Series Econometrics, De Gruyter, De Gruyter, vol. 3(1), pages 1-26, February.
  6. Robert J. Barro, 2007. "Rare Disasters, Asset Prices, and Welfare Costs," NBER Working Papers 13690, National Bureau of Economic Research, Inc.
  7. Pesaran, M. Hashem & Pettenuzzo, Davide & Timmermann, Allan, 2004. "Forecasting Time Series Subject to Multiple Structural Breaks," IZA Discussion Papers 1196, Institute for the Study of Labor (IZA).
  8. Hendry, David F. & Ericsson, Neil R., 1991. "Modeling the demand for narrow money in the United Kingdom and the United States," European Economic Review, Elsevier, Elsevier, vol. 35(4), pages 833-881, May.
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  11. David Hendry & Carlos Santos, 2010. "An Automatic Test of Super Exogeneity," Economics Series Working Papers 476, University of Oxford, Department of Economics.
  12. Christophe Bontemps & Grayham E. Mizon, 2008. "Encompassing: Concepts and Implementation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(s1), pages 721-750, December.
  13. Jennifer Castle & David Hendry & Jurgen A. Doornik, 2008. "Model Selection when there are Multiple Breaks," Economics Series Working Papers 407, University of Oxford, Department of Economics.
  14. Pesaran, M. Hashem & Timmermann, Allan, 2007. "Selection of estimation window in the presence of breaks," Journal of Econometrics, Elsevier, Elsevier, vol. 137(1), pages 134-161, March.
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  16. repec:sae:niesru:v:166:y::i:1:p:57-73 is not listed on IDEAS
  17. Castle, Jennifer L. & Fawcett, Nicholas W.P. & Hendry, David F., 2010. "Forecasting with equilibrium-correction models during structural breaks," Journal of Econometrics, Elsevier, Elsevier, vol. 158(1), pages 25-36, September.
  18. Hendry, David F. & Massmann, Michael, 2007. "Co-Breaking: Recent Advances and a Synopsis of the Literature," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 33-51, January.
  19. Taleb, Nassim Nicholas, 2009. "Errors, robustness, and the fourth quadrant," International Journal of Forecasting, Elsevier, Elsevier, vol. 25(4), pages 744-759, October.
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Cited by:
  1. Alexander HARIN, 2014. "Partially Unforeseen Events. Corrections and Correcting Formulae for Forecasts," Expert Journal of Economics, Sprint Investify, vol. 2(2), pages 69-79.

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