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Forecast Combination Based on Multiple Encompassing Tests in a Macroeconomic DSGE System

Author

Listed:
  • Costantini, Mauro

    (Department of Economics, University of Vienna, Vienna, Austria)

  • Gunter, Ulrich

    (Department of Economics, University of Vienna, Vienna, Austria)

  • Kunst, Robert M.

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria and Department of Economics, University of Vienna, Vienna, Austria)

Abstract

We use data generated by a macroeconomic DSGE model to study the relative benefits of forecast combinations based on forecast-encompassing tests relative to simple uniformly weighted forecast averages across rival models. Assumed rival models are four linear autoregressive specifications, one of them a more sophisticated factor-augmented vector autoregression (FAVAR). The forecaster is assumed not to know the true data-generating DSGE model. The results critically depend on the prediction horizon. While one-step prediction hardly supports test-based combinations, the test-based procedure attains a clear lead at prediction horizons greater than two.

Suggested Citation

  • Costantini, Mauro & Gunter, Ulrich & Kunst, Robert M., 2010. "Forecast Combination Based on Multiple Encompassing Tests in a Macroeconomic DSGE System," Economics Series 251, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:251
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    File URL: http://www.ihs.ac.at/publications/eco/es-251.pdf
    File Function: First version, 2010
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    More about this item

    Keywords

    Combining forecasts; encompassing tests; model selection; time series; DSGE model;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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