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Unpredictability and the Foundations of Economic Forecasting

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  • David F. Hendry

Abstract

We revisit the concept of unpredictability to explore its implications for forecasting strategies in a non-stationary world subject to structural breaks, where model and mechanism differ. Six aspects of the role of unpredictability are distinguished, compounding the four additional mistakes most likely in estimated forecasting models. Structural breaks, rather than limited information, are the key problem, exacerbated by conflicting requirements on `forecast-error corrections'. We consider model transformations and corrections to reduce forecast-error biases, as usual at some cost in increased forecast-error variances. The analysis is illustrated by an empirical application to M1 in the UK

Suggested Citation

  • David F. Hendry, 2004. "Unpredictability and the Foundations of Economic Forecasting," Econometric Society 2004 Australasian Meetings 27, Econometric Society.
  • Handle: RePEc:ecm:ausm04:27
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    References listed on IDEAS

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    1. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
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    3. Paruolo, Paolo, 1996. "On the determination of integration indices in I(2) systems," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 313-356.
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    5. Melino, Angelo & Turnbull, Stuart M., 1990. "Pricing foreign currency options with stochastic volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 239-265.
    6. Hendry, David F. & Ericsson, Neil R., 1991. "Modeling the demand for narrow money in the United Kingdom and the United States," European Economic Review, Elsevier, vol. 35(4), pages 833-881, May.
    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.
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    9. Hendry, David F. & Clements, Michael P., 2003. "Economic forecasting: some lessons from recent research," Economic Modelling, Elsevier, vol. 20(2), pages 301-329, March.
    10. repec:cup:etheor:v:8:y:1992:i:2:p:188-202 is not listed on IDEAS
    11. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
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    13. Bontemps, Christophe & Mizon, Grayham E., 2001. "Congruence and encompassing," Discussion Paper Series In Economics And Econometrics 0107, Economics Division, School of Social Sciences, University of Southampton.
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    Cited by:

    1. Clark, Todd & McCracken, Michael, 2013. "Advances in Forecast Evaluation," Handbook of Economic Forecasting, Elsevier.
    2. J. M. Kargbo, 2007. "Forecasting agricultural exports and imports in South Africa," Applied Economics, Taylor & Francis Journals, vol. 39(16), pages 2069-2084.
    3. Qin, Duo & Cagas, Marie Anne & Ducanes, Geoffrey & Magtibay-Ramos, Nedelyn & Quising, Pilipinas, 2008. "Automatic leading indicators versus macroeconometric structural models: A comparison of inflation and GDP growth forecasting," International Journal of Forecasting, Elsevier, vol. 24(3), pages 399-413.
    4. Kirstin Hubrich & David F. Hendry, 2005. "Forecasting Aggregates by Disaggregates," Computing in Economics and Finance 2005 270, Society for Computational Economics.
    5. Hendry, David F & Hubrich, Kirstin, 2006. "Forecasting Economic Aggregates by Disaggregates," CEPR Discussion Papers 5485, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Forecasting; Unpredictability;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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