IDEAS home Printed from https://ideas.repec.org/p/nuf/econwp/0414.html
   My bibliography  Save this paper

Robustifying Forecasts from Equilibrium-Correction Models

Author

Listed:
  • David F. Hendry

    () (Economcis Department, University of Oxford)

Abstract

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.

Suggested Citation

  • David F. Hendry, 2004. "Robustifying Forecasts from Equilibrium-Correction Models," Economics Papers 2004-W14, Economics Group, Nuffield College, University of Oxford.
  • Handle: RePEc:nuf:econwp:0414
    as

    Download full text from publisher

    File URL: http://www.nuff.ox.ac.uk/economics/papers/2004/w14/DFHEqCMRobust.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
    2. 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.
    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.
    4. Francis X. Diebold & Jose A. Lopez, 1995. "Forecast evaluation and combination," Research Paper 9525, Federal Reserve Bank of New York.
    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.
    8. 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.
    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.
    12. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, number 9780521634809, December.
    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.
    14. 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.
    15. 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, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: https://www.nuffield.ox.ac.uk/economics/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.