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Intercept Corrections and Structural Change

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  • Clements, Michael P
  • Hendry, David F

Abstract

Analyses of forecasting that assume a constant, time-invariant data generating process (DGP), and so implicitly rule out structural change or regime shifts in the economy, ignore an aspect of the real world responsible for some of the more dramatic historical episodes of predictive failure. Some models may offer greater protection against unforeseen structural breaks than others, and various tricks may be employed to robustify forecasts to change. We show that in certain states of nature, vector autoregressions in the differences of the variables (in the spirit of Box-Jenkins time-series-modelling), can outperform vector 'equilibrium-correction' mechanisms. However, appropriate intercept corrections can enhance the performance of the latter, albeit that reductions in forecast bias may only be achieved at the cost of inflated forecast error variances. Copyright 1996 by John Wiley & Sons, Ltd.

Suggested Citation

  • Clements, Michael P & Hendry, David F, 1996. "Intercept Corrections and Structural Change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 475-494, Sept.-Oct.
  • Handle: RePEc:jae:japmet:v:11:y:1996:i:5:p:475-94
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    References listed on IDEAS

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    1. Hansen, Bruce E, 1994. "Autoregressive Conditional Density Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-730, August.
    2. Zellner, A., 1992. "Statistics, Science and Public Policy," Papers 92-21, California Irvine - School of Social Sciences.
    3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    4. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
    5. McCloskey, Donald N, 1985. "The Loss Function Has Been Mislaid: The Rhetoric of Significance Tests," American Economic Review, American Economic Association, vol. 75(2), pages 201-205, May.
    6. Newey, Whitney K & Powell, James L, 1987. "Asymmetric Least Squares Estimation and Testing," Econometrica, Econometric Society, vol. 55(4), pages 819-847, July.
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