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Long-run forecasting in multicointegrated systems

  • Tom Engsted

    (Department of Finance, The Aarhus School of Business, Denmark)

  • Niels Haldrup

    (Department of Economics, University of Aarhus, Denmark)

  • Boriss Siliverstovs

    (DIW Berlin, Germany)

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.

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File URL: http://hdl.handle.net/10.1002/for.925
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 23 (2004)
Issue (Month): 5 ()
Pages: 315-335

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Handle: RePEc:jof:jforec:v:23:y:2004:i:5:p:315-335
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  1. 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.
  2. Engsted, Tom & Gonzalo, Jesus & Haldrup, Niels, 1997. "Testing for multicointegration," Economics Letters, Elsevier, vol. 56(3), pages 259-266, November.
  3. 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.
  4. Peter F. Christoffersen & Francis X. Diebold, 1997. "Cointegration and long-horizon forecasting," Working Papers 97-14, Federal Reserve Bank of Philadelphia.
  5. 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.
  6. Niels Haldrup, 1998. "An Econometric Analysis of I(2) Variables," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 595-650, December.
  7. 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.
  8. Clements, M.P. & Hendry, D.F., 1992. "Forecasting in Cointegrated Systems," Economics Series Working Papers 99139, University of Oxford, Department of Economics.
  9. 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.
  10. Elliott, Graham & Komunjer, Ivana & Timmermann, Allan G, 2003. "Estimating Loss Function Parameters," CEPR Discussion Papers 3821, C.E.P.R. Discussion Papers.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. Boriss Siliverstovs, 2006. "Multicointegration in US consumption data," Applied Economics, Taylor & Francis Journals, vol. 38(7), pages 819-833.
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