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Forecasting Using Bayesian and Information-Theoretic Model Averaging: An Application to U.K. Inflation

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  • Kapetanios, George
  • Labhard, Vincent
  • Price, Simon

Abstract

In recent years there has been increasing interest in forecasting methods that utilise large data sets, driven partly by the recognition that policymaking institutions need to process large quantities of information. Factor analysis is a popular way of doing this. Forecast combination is another, and it is on this that we concentrate. Bayesian model averaging methods have been widely employed in this area, but a neglected alternative approach employed in this paper uses information theoretic based weights. We consider the use of model averaging in forecasting UK inflation with a large data set from this perspective. We find that an information theoretic model averaging scheme can be a powerful alternative both to the more widely used Bayesian model averaging scheme and to factor models.
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Suggested Citation

  • Kapetanios, George & Labhard, Vincent & Price, Simon, 2008. "Forecasting Using Bayesian and Information-Theoretic Model Averaging: An Application to U.K. Inflation," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 33-41, January.
    • Handle: RePEc:bes:jnlbes:v:26:y:2008:p:33-41
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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