Forecasting Levels of log Variables in Vector Autoregressions
Sometimes forecasts of the original variable are of interest al- though a variable appears in logarithms (logs) in a system of time series. In that case converting the forecast for the log of the variable to a naive forecast of the original variable by simply applying the exponential transformation is not optimal theoretically. A simple expression for the optimal forecast un- der normality assumptions is derived. Despite its theoretical advantages the optimal forecast is shown to be inferior to the naive forecast if speci¯cation and estimation uncertainty are taken into account. Hence, in practice using the exponential of the log forecast is preferable to using the optimal forecast.
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- Helmut Lütkepohl & Fang Xu, 2012.
"The role of the log transformation in forecasting economic variables,"
Springer, vol. 42(3), pages 619-638, June.
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International Journal of Forecasting,
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