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Forecast Densities for Economic Aggregates from Disaggregate Ensembles

  • Francesco Ravazzolo

    ()

  • Shaun P. Vahey

    ()

We propose a methodology for producing forecast densities for economic aggregates based on disaggregate evidence. Our ensemble predictive methodology utilizes a linear mixture of experts framework to combine the forecast densities from potentially many component models. Each component represents the univariate dynamic process followed by a single disaggregate variable. The ensemble produced from these components approximates the many unknown relationships between the disaggregates and the aggregate by using time-varying weights on the component forecast densities. In our application, we use the disaggregate ensemble approach to forecast US Personal Consumption Expenditure inflation from 1997Q2 to 2008Q1. Our ensemble combining the evidence from 11 disaggregate series outperforms an aggregate autoregressive benchmark, and an aggregate time-varying parameter specification in density forecasting.

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File URL: http://cbe.anu.edu.au/research/papers/camawpapers/Papers/2010/Ravazzolo_Vahey_102010.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2010-10.

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Length: 31 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:een:camaaa:2010-10
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  1. James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  2. Todd E. Clark, 2009. "Real-time density forecasts from VARs with stochastic volatility," Research Working Paper RWP 09-08, Federal Reserve Bank of Kansas City.
  3. Valentina Corradi & Norman Swanson, 2004. "Predictive Density Evaluation," Departmental Working Papers 200419, Rutgers University, Department of Economics.
  4. Ida Wolden Bache & James Mitchell & Francesco Ravazzolo & Shaun P. Vahey, 2009. "Macro modelling with many models," Working Paper 2009/15, Norges Bank.
  5. Kenneth F. Wallis, 2005. "Combining Density and Interval Forecasts: A Modest Proposal," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 983-994, December.
  6. Jan J. J. Groen & Richard Paap & Francesco Ravazzolo, 2013. "Real-Time Inflation Forecasting in a Changing World," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(1), pages 29-44, January.
  7. Gianni Amisano & Raffaella Giacomini, 2005. "Comparing Density Forecsts via Weighted Likelihood Ratio Tests," Working Papers ubs0504, University of Brescia, Department of Economics.
  8. Wallis, Kenneth F., 2003. "Chi-squared tests of interval and density forecasts, and the Bank of England's fan charts," International Journal of Forecasting, Elsevier, vol. 19(2), pages 165-175.
  9. Todd E. Clark & Michael W. McCracken, 2007. "Averaging forecasts from VARs with uncertain instabilities," Finance and Economics Discussion Series 2007-42, Board of Governors of the Federal Reserve System (U.S.).
  10. Anne Sofie Jore & James Mitchell & Shaun P. Vahey, 2010. "Combining forecast densities from VARs with uncertain instabilities," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 621-634.
  11. James H. Stock & Mark W. Watson, 2006. "Why Has U.S. Inflation Become Harder to Forecast?," NBER Working Papers 12324, National Bureau of Economic Research, Inc.
  12. Capistrán, Carlos & Timmermann, Allan, 2009. "Forecast Combination With Entry and Exit of Experts," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 428-440.
  13. Tae-Hwy Lee & Yong Bao & Burak Saltoğlu, 2007. "Comparing density forecast models Previous versions of this paper have been circulated with the title, 'A Test for Density Forecast Comparison with Applications to Risk Management' since October 2003;," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 26(3), pages 203-225.
  14. Dr. James Mitchell, 2009. "Macro Modelling with Many Models," NIESR Discussion Papers 2384, National Institute of Economic and Social Research.
  15. Timmermann, Allan, 2006. "Forecast Combinations," Handbook of Economic Forecasting, Elsevier.
  16. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  17. repec:nsr:niesrd:337 is not listed on IDEAS
  18. Kim, Sangjoon & Shephard, Neil & Chib, Siddhartha, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 361-93, July.
  19. Christian Kascha & Francesco Ravazzolo, 2010. "Combining inflation density forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(1-2), pages 231-250.
  20. Todd E. Clark, 2006. "Disaggregate evidence on the persistence of consumer price inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(5), pages 563-587.
  21. Giordani, Paolo & Kohn, Robert, 2006. "Efficient Bayesian Inference for Multiple Change-Point and Mixture Innovation Models," Working Paper Series 196, Sveriges Riksbank (Central Bank of Sweden).
  22. Gary Koop & Simon M. Potter, 2007. "Estimation and Forecasting in Models with Multiple Breaks," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 763-789.
  23. 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.
  24. 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.
  25. 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 777, National Institute of Economic and Social Research.
  26. Gneiting, Tilmann & Raftery, Adrian E., 2007. "Strictly Proper Scoring Rules, Prediction, and Estimation," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 359-378, March.
  27. Valentina Corradi & Norman Swanson, 2006. "Predictive Density Evaluation. Revised," Departmental Working Papers 200621, Rutgers University, Department of Economics.
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