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Forecast combination when outcomes are difficult to predict

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  • Graham Elliott

    (University of California, San Diego)

Abstract

We show that when outcomes are difficult to forecast in the sense that forecast errors have a large common component that (a) optimal weights are not affected by this common component, and may well be far from equal to each other but (b) the relative mean square error loss from averaging over optimal combination can be small. Hence, researchers could well estimate combining weights that indicate that correlations could be exploited for better forecasts only to find that the difference in terms of loss is negligible. The results then provide an additional explanation for the commonly encountered practical situation of the averaging of forecasts being difficult to improve upon.

Suggested Citation

  • Graham Elliott, 2017. "Forecast combination when outcomes are difficult to predict," Empirical Economics, Springer, vol. 53(1), pages 7-20, August.
  • Handle: RePEc:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-017-1253-2
    DOI: 10.1007/s00181-017-1253-2
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    References listed on IDEAS

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    Cited by:

    1. Marcus P. A. Cobb, 2020. "Aggregate density forecasting from disaggregate components using Bayesian VARs," Empirical Economics, Springer, vol. 58(1), pages 287-312, January.
    2. Martin, Gael M. & Loaiza-Maya, Rubén & Maneesoonthorn, Worapree & Frazier, David T. & Ramírez-Hassan, Andrés, 2022. "Optimal probabilistic forecasts: When do they work?," International Journal of Forecasting, Elsevier, vol. 38(1), pages 384-406.
    3. Cobb, Marcus P A, 2018. "Improving Underlying Scenarios for Aggregate Forecasts: A Multi-level Combination Approach," MPRA Paper 88593, University Library of Munich, Germany.
    4. Knut Are Aastveit & James Mitchell & Francesco Ravazzolo & Herman van Dijk, 2018. "The Evolution of Forecast Density Combinations in Economics," Tinbergen Institute Discussion Papers 18-069/III, Tinbergen Institute.
    5. Yongchen Zhao, 2021. "The robustness of forecast combination in unstable environments: a Monte Carlo study of advanced algorithms," Empirical Economics, Springer, vol. 61(1), pages 173-199, July.

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    More about this item

    Keywords

    Forecasting; Forecast combination; Average forecasts;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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