Long-run forecasting in multicointegrated systems
We extend the analysis of Christoffersen and Diebold (1998) on long-run forecasting in cointegrated systems to multicointegrated systems. For the forecast evaluation we consider several loss functions, each of which has a particular interpretation in the context of stock-flow models where multicointegration typically occurs. A loss function based on a standard mean square forecast error (MSFE) criterion focuses on the forecast errors of the flow variables alone. Likewise, a loss function based on the triangular representation of cointegrated systems (suggested by Christoffersen and Diebold) considers forecast errors associated with changes in both stock (modelled through the cointegrating restrictions) and flow variables. We suggest a new loss function based on the triangular representation of multicointegrated systems which further penalizes deviations from the long-run relationship between the levels of stock and flow variables as well as changes in the flow variables. Among other things, we show that if one is concerned with all possible long-run relations between stock and flow variables, this new loss function entails high and increasing forecasting gains compared to both the standard MSFE criterion and Christoffersen and Diebold's criterion. This paper demonstrates the importance of carefully selecting loss functions in forecast evaluation of models involving stock and flow variables. Copyright © 2004 John Wiley & Sons, Ltd.
Volume (Year): 23 (2004)
Issue (Month): 5 ()
|Contact details of provider:|| Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boriss Siliverstovs, 2003.
"Multicointegration in US Consumption Data,"
Discussion Papers of DIW Berlin
382, DIW Berlin, German Institute for Economic Research.
- Elliott, Graham & Komunjer, Ivana & Timmermann, Allan G, 2003. "Estimating Loss Function Parameters," CEPR Discussion Papers 3821, C.E.P.R. Discussion Papers.
- Anindya Banerjee & Lynne Cockerell & Bill Russell, 2000.
"An I(2) Analysis of Inflation and the Markup,"
Dundee Discussion Papers in Economics
120, Economic Studies, University of Dundee.
- Christoffersen, Peter F & Diebold, Francis X, 1998.
"Cointegration and Long-Horizon Forecasting,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 16(4), pages 450-58, October.
- Peter F. Christoffersen & Francis X. Diebold, 1997. "Cointegration and long-horizon forecasting," Working Papers 97-14, Federal Reserve Bank of Philadelphia.
- Peter F. Christoffersen & Francis X. Diebold, 1997. "Cointegration and Long-Horizon Forecasting," NBER Technical Working Papers 0217, National Bureau of Economic Research, Inc.
- John Y. Campbell & Robert J. Shiller, 1986.
"Cointegration and Tests of Present Value Models,"
NBER Working Papers
1885, National Bureau of Economic Research, Inc.
- Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
- John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
- Clements, Michael P & Hendry, David F, 1995. "Forecasting in Cointegration Systems," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 127-46, April-Jun.
- Granger, C W J & Lee, T H, 1989. "Investigation of Production, Sales and Inventory Relationships Using Multicointegration and Non-symmetric Error Correction Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(S), pages S145-59, Supplemen.
- Clements, M.P. & Hendry, D., 1992. "On the Limitations of Comparing Mean Square Forecast Errors," Economics Series Working Papers 99138, University of Oxford, Department of Economics.
- Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996.
"Trend-Stationarity in the I(2) Cointegration Model,"
96-12, University of Copenhagen. Department of Economics.
- Rahbek, Anders & Christian Kongsted, Hans & Jorgensen, Clara, 1999. "Trend stationarity in the I(2) cointegration model," Journal of Econometrics, Elsevier, vol. 90(2), pages 265-289, June.
- Peter C.B. Phillips, 1988.
"Optimal Inference in Cointegrated Systems,"
Cowles Foundation Discussion Papers
866R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
- Clements, M.P. & Hendry, D.F., 1992. "Forecasting in Cointegrated Systems," Economics Series Working Papers 99139, University of Oxford, Department of Economics.
- Niels Haldrup, 1998. "An Econometric Analysis of I(2) Variables," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 595-650, December.
- Engsted, Tom & Gonzalo, Jesus & Haldrup, Niels, 1997. "Testing for multicointegration," Economics Letters, Elsevier, vol. 56(3), pages 259-266, November.
- Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
- Engsted, Tom & Haldrup, Niels, 1999. " Multicointegration in Stock-Flow Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(2), pages 237-54, May.
When requesting a correction, please mention this item's handle: RePEc:jof:jforec:v:23:y:2004:i:5:p:315-335. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.