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Unpredictability and the Foundations of Economic Forecasting

  • David F. Hendry

    ()

    (Economics Department, University of Oxford)

We revisit the concept of unpredictability to explore its implications for forecasting strategies in a non-stationary world subject to structural breaks, where model and mechanism differ. Six aspects of the role of unpredictability are distinguished, compounding the four additional mistakes most likely in estimated forecasting models. Structural breaks, rather than limited information, are the key problem, exacerbated by conflicting requirements on forecast-error corrections. We consider model transformations and corrections to reduce forecast-error biases, as usual at some cost in increased forecast-error variances. The analysis is illustrated by an empirical application to M1 in the UK.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2004/w15/ForcBasis.pdf
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Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2004-W15.

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Length: 30 pages
Date of creation: 06 May 2004
Date of revision:
Handle: RePEc:nuf:econwp:0415
Contact details of provider: Web page: http://www.nuff.ox.ac.uk/economics/

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  1. repec:cup:cbooks:9780521632423 is not listed on IDEAS
  2. 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.
  3. Sangjoon Kim & Neil Shephard, 1994. "Stochastic volatility: likelihood inference and comparison with ARCH models," Economics Papers 3., Economics Group, Nuffield College, University of Oxford.
  4. Chevillon, Guillaume & Hendry, David F., 2005. "Non-parametric direct multi-step estimation for forecasting economic processes," International Journal of Forecasting, Elsevier, vol. 21(2), pages 201-218.
  5. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
  6. Clara Jørgensen & Hans Christian Kongsted & Anders Rahbek, 1996. "Trend-Stationarity in the I(2) Cointegration Model," Discussion Papers 96-12, University of Copenhagen. Department of Economics.
  7. Francis X. Diebold & Jose A. Lopez, 1996. "Forecast Evaluation and Combination," NBER Technical Working Papers 0192, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164, March.
  11. Hendry, David F. & Clements, Michael P., 2001. "Economic forecasting: some lessons from recent research," Working Paper Series 0082, European Central Bank.
  12. repec:cup:cbooks:9780521634809 is not listed on IDEAS
  13. 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.
  14. repec:cup:etheor:v:8:y:1992:i:2:p:188-202 is not listed on IDEAS
  15. Melino, Angelo & Turnbull, Stuart M., 1990. "Pricing foreign currency options with stochastic volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 239-265.
  16. Paruolo, Paolo, 1996. "On the determination of integration indices in I(2) systems," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 313-356.
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