Robustifying Forecasts from Equilibrium-Correction Models
In a non-stationary world subject to structural breaks, where model and mechanism differ, equilibrium-correction models are a risky device from which to forecast. Equilibrium shifts entail systematic forecast failure, and indeed forecasts will tend to move in the opposite direction to the data. A new explanation for the empirical success of second differencing is proposed. We consider model transformations based on additional differencing to reduce forecast-error biases, as usual at some cost in increased forecast-error variances. The analysis is illustrated by an empirical application to narrow money holdings in the UK.
|Date of creation:||01 Apr 2004|
|Date of revision:|
|Contact details of provider:|| Web page: https://www.nuffield.ox.ac.uk/economics/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:cup:etheor:v:8:y:1992:i:2:p:188-202 is not listed on IDEAS
- David Hendry & Michael P. Clements, 2001.
"Economic Forecasting: Some Lessons from Recent Research,"
Economics Series Working Papers
78, University of Oxford, Department of Economics.
- Hendry, David F. & Clements, Michael P., 2003. "Economic forecasting: some lessons from recent research," Economic Modelling, Elsevier, vol. 20(2), pages 301-329, March.
- David Hendry & Michael P. Clements, 2001. "Economic Forecasting: Some Lessons from Recent Research," Economics Papers 2002-W11, Economics Group, Nuffield College, University of Oxford.
- Hendry, David F. & Clements, Michael P., 2001. "Economic forecasting: some lessons from recent research," Working Paper Series 0082, European Central Bank.
- Hendry, David F & Michael P. Clements, 2002. "Economic Forecasting: Some Lessons from Recent Research," Royal Economic Society Annual Conference 2002 99, Royal Economic Society.
- Clements,Michael & Hendry,David, 1998.
"Forecasting Economic Time Series,"
Cambridge University Press, number 9780521632423, April.
- Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996.
"Trend-Stationarity in the I(2) Cointegration Model,"
96-12, University of Copenhagen. Department of Economics.
- 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.
- Melino, Angelo & Turnbull, Stuart M., 1990. "Pricing foreign currency options with stochastic volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 239-265.
- Paruolo, Paolo, 1996. "On the determination of integration indices in I(2) systems," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 313-356.
- Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 361-393.
- Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, December.
- Francis X. Diebold & Jose A. Lopez, 1996.
"Forecast Evaluation and Combination,"
NBER Technical Working Papers
0192, National Bureau of Economic Research, Inc.
- 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.
- David F. Hendry & Neil R. Ericsson, 1990. "Modeling the demand for narrow money in the United Kingdom and the United States," International Finance Discussion Papers 383, Board of Governors of the Federal Reserve System (U.S.).
- Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
- Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000.
"The Generalized Dynamic-Factor Model: Identification And Estimation,"
The Review of Economics and Statistics,
MIT Press, vol. 82(4), pages 540-554, November.
- Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
- Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
- Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, December.
- Johansen, Søren, 1992. "A Representation of Vector Autoregressive Processes Integrated of Order 2," Econometric Theory, Cambridge University Press, vol. 8(02), pages 188-202, June.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nuf:econwp:0414. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett)
If references are entirely missing, you can add them using this form.