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Evaluating ensemble density combination - forecasting GDP and inflation

  • Karsten R. Gerdrup

    ()

    (Norges Bank (Central Bank of Norway))

  • Anne Sofie Jore

    ()

    (Norges Bank (Central Bank of Norway))

  • Christie Smith

    (Reserve Bank of New Zealand)

  • Leif Anders Thorsrud

    ()

    (Norges Bank (Central Bank of Norway))

Forecast combination has become popular in central banks as a means to improve forecasts and to alleviate the risk of selecting poor models. However, if a model suite is populated with many similar models, then the weight attached to other independent models may be lower than warranted by their performance. One way to mitigate this problem is to group similar models into distinct `ensembles'. Using the original suite of models in Norges Bank's system for averaging models (SAM), we evaluate whether forecast performance can be improved by combining ensemble densities, rather than combining individual model densities directly. We evaluate performance both in terms of point forecasts and density forecasts, and test whether the densities are well-calibrated. We find encouraging results for combining ensembles.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2009/WP-200919/
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Paper provided by Norges Bank in its series Working Paper with number 2009/19.

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Length: 37 pages
Date of creation: 11 Nov 2009
Date of revision:
Handle: RePEc:bno:worpap:2009_19
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  1. Carlos Capistrán & Allan Timmermann, 2006. "Forecast Combination with Entry and Exit of Experts," Working Papers 2006-08, Banco de México.
  2. Aiolfi, Marco & Timmermann, Allan, 2006. "Persistence in forecasting performance and conditional combination strategies," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 31-53.
  3. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
  4. Hilde C. Bjørnland & Karsten Gerdrup & Anne Sofie Jore & Christie Smith & Leif Anders Thorsrud, 2012. "Does Forecast Combination Improve Norges Bank Inflation Forecasts?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(2), pages 163-179, 04.
  5. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 465-74, October.
  6. Robert T. Clemen, 1987. "Combining Overlapping Information," Management Science, INFORMS, vol. 33(3), pages 373-380, March.
  7. Wallis, Kenneth F., 2002. "Chi-squared tests of interval and density forecasts, and the Bank of England's fan charts," Royal Economic Society Annual Conference 2002 181, Royal Economic Society.
  8. Knut Are Aastveit & Tørres G. Trovik, 2008. "Nowcasting Norwegian GDP: The role of asset prices in a small open economy," Working Paper 2007/09, Norges Bank.
  9. Anne Sofie Jore & James Mitchell & Shaun Vahey, 2008. "Combining Forecast Densities from VARs with Uncertain Instabilities," Reserve Bank of New Zealand Discussion Paper Series DP2008/18, Reserve Bank of New Zealand.
  10. Andrew Ang & Monika Piazzesi & Min Wei, 2003. "What does the yield curve tell us about GDP growth?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  11. Ida Wolden Bache & Anne Sofie Jore & James Mitchell & Shaun P. Vahey, 2009. "Combining VAR and DSGE forecast densities," Working Paper 2009/23, Norges Bank.
  12. Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
  13. Geweke, John & Amisano, Gianni, 2008. "Comparing and evaluating Bayesian predictive distributions of assets returns," Working Paper Series 0969, European Central Bank.
  14. Stock, James H. & Watson, Mark W., 2006. "Forecasting with Many Predictors," Handbook of Economic Forecasting, Elsevier.
  15. Ida Wolden Bache & James Mitchell & Francesco Ravazzolo & Shaun P. Vahey, 2009. "Macro modelling with many models," Working Paper 2009/15, Norges Bank.
  16. Jeremy Smith & Kenneth F. Wallis, 2009. "A Simple Explanation of the Forecast Combination Puzzle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(3), pages 331-355, 06.
  17. Todd E. Clark & Michael W. McCracken, 2007. "Forecasting with small macroeconomic VARs in the presence of instabilities," Finance and Economics Discussion Series 2007-41, Board of Governors of the Federal Reserve System (U.S.).
  18. Troy Matheson, 2005. "Factor model forecasts for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2005/01, Reserve Bank of New Zealand.
  19. repec:nsr:niesrd:337 is not listed on IDEAS
  20. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
  21. Marco Aiolfi & Carlos Capistrán & Allan Timmermann, 2010. "Forecast Combinations," Working Papers 2010-04, Banco de México.
  22. Christian Kascha & Francesco Ravazzolo, 2008. "Combining inflation density forecasts," Working Paper 2008/22, Norges Bank.
  23. Dr. James Mitchell, 2005. "Evaluating, comparing and combining density forecasts using the KLIC with an application to the Bank of England and NIESR ÔfanÕ charts of inflation," NIESR Discussion Papers 253, National Institute of Economic and Social Research.
  24. Robert L. Winkler, 1981. "Combining Probability Distributions from Dependent Information Sources," Management Science, INFORMS, vol. 27(4), pages 479-488, April.
  25. Makridakis, Spyros & Chatfield, Chris & Hibon, Michele & Lawrence, Michael & Mills, Terence & Ord, Keith & Simmons, LeRoy F., 1993. "The M2-competition: A real-time judgmentally based forecasting study," International Journal of Forecasting, Elsevier, vol. 9(1), pages 5-22, April.
  26. Dr. James Mitchell, 2009. "Macro Modelling with Many Models," NIESR Discussion Papers 337, National Institute of Economic and Social Research.
  27. James Mitchell & Stephen G. Hall, 2005. "Evaluating, Comparing and Combining Density Forecasts Using the KLIC with an Application to the Bank of England and NIESR 'Fan' Charts of Inflation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 995-1033, December.
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