Long-run forecasting in multicointegrated systems
In this paper long-run forecasting of multicointegrating variables is investigated. Multicointegration typically occurs in dynamic systems involving both stock and flow variables whereby a common feature in the form of shared stochastic trends is present across different levels of multiple time series. Hence, the effect of imposing this "common feature" restriction on out-of-sample valuation and forecasting accuracy of such variables is of interest. In particular, we compare the long-run forecasting performance of the multicointegrated variables between a model that correctly imposes the "common feature" restrictions and a (univariate) model that omits these multicointegrating restrictions completely. We employ different loss functions based on a range of mean square forecast error criteria, and the results indicate that different loss functions result in different ranking of models with respect to their infinite horizon forecasting performance. We consider loss functions using a standard trace mean square forecast error criterion (penalizing the forecast errors of flow variables only), and a loss function evaluating forecast errors of changes in both stock and flow variables. The latter loss function is based on the triangular representation of cointegrated systems and was initially suggested by Christoffersen and Diebold (1998). It penalizes deviations from long-run relations among the flow variables through cointegrating restrictions. We present a new loss function which further penalizes deviations in the long run relationship between the levels of stock and flow variables. It is derived from the triangular representation of multicointegrated systems. Using this criterion, system forecasts from a model incorporating multicointegration restrictions dominate forecasts from univariate models. The paper highlights the importance of carefully selecting loss functions in forecast evaluation of models involving stock and flow variables.
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.:
- 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.
- 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.
- Boriss Siliverstovs, 2003.
"Multicointegration in US Consumption Data,"
Discussion Papers of DIW Berlin
382, DIW Berlin, German Institute for Economic Research.
- Francis X. Diebold & Peter F. Christoffersen, 1997.
"Cointegration and Long-Horizon Forecasting,"
IMF Working Papers
97/61, International Monetary Fund.
- Peter F. Christoffersen & Francis X. Diebold, 1997. "Cointegration and Long-Horizon Forecasting," NBER Technical Working Papers 0217, National Bureau of Economic Research, Inc.
- Peter F. Christoffersen & Francis X. Diebold, 1997. "Cointegration and long-horizon forecasting," Working Papers 97-14, Federal Reserve Bank of Philadelphia.
- Clements, M.P. & Hendry, D.F., 1992. "Forecasting in Cointegrated Systems," Economics Series Working Papers 99139, University of Oxford, 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.
- 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," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
- 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.
- Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996. "Trend-Stationarity in the I(2) Cointegration Model," Discussion Papers 96-12, University of Copenhagen. Department of Economics.
- 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.
- Niels Haldrup, 1998. "An Econometric Analysis of I(2) Variables," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 595-650, December.
- 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.
- 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.
- 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.
- Engsted, Tom & Gonzalo, Jesus & Haldrup, Niels, 1997. "Testing for multicointegration," Economics Letters, Elsevier, vol. 56(3), pages 259-266, November.
- Elliott, Graham & Komunjer, Ivana & Timmermann, Allan G, 2003. "Estimating Loss Function Parameters," CEPR Discussion Papers 3821, C.E.P.R. Discussion Papers.
- 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.
When requesting a correction, please mention this item's handle: RePEc:aah:aarhec:2002-15. 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: ()
If references are entirely missing, you can add them using this form.