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Modelling methodology and forecast failure

  • Michael P. Clements
  • David F. Hendry

We analyse by simulation the impact of model-selection strategies (sometimes called pre-testing) on forecast performance in both constant-and non-constant-parameter processes. Restricted, unrestricted and selected models are compared when either of the first two might generate the data. We find little evidence that strategies such as general-to-specific induce significant over-fitting, or thereby cause forecast-failure rejection rates to greatly exceed nominal sizes. Parameter non-constancies put a premium on correct specification, but in general, model-selection effects appear to be relatively small, and progressive research is able to detect the mis-specifications. Copyright Royal Economic Society, 2002

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Article provided by Royal Economic Society in its journal The Econometrics Journal.

Volume (Year): 5 (2002)
Issue (Month): 2 (06)
Pages: 319-344

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Handle: RePEc:ect:emjrnl:v:5:y:2002:i:2:p:319-344
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