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Combining Forecast Densities from VARs with Uncertain Instabilities

Recursive-weight forecast combination is often found to an ineffective method of improving point forecast accuracy in the presence of uncertain instabilities. We examine the effectiveness of this strategy for forecast densities using (many) VARs and ARs of output, prices and interest rates. Our proposed recursive-weights density combination strategy, based on the recursive logarithmic score of the forecast densities, produces accurate predictive densities by giving substantial weight to models that allow for structural breaks. In contrast, equal-weight combinations produce poor real-time US forecast densities for Great Moderation data. Classification-C32, C53, E37

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2008/dp08_18.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2008/18.

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Length: 19 p.
Date of creation: Dec 2008
Date of revision:
Handle: RePEc:nzb:nzbdps:2008/18
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  1. James Mitchell & Stephen G. Hall, 2005. "Evaluating, Comparing and Combining Density Forecasts Using the KLIC with an Application to the Bank of England and NIESR 'Fan' Charts of Inflation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 995-1033, December.
  2. Robert L. Winkler, 1981. "Combining Probability Distributions from Dependent Information Sources," Management Science, INFORMS, vol. 27(4), pages 479-488, April.
  3. Kenneth F. Wallis, 2005. "Combining Density and Interval Forecasts: A Modest Proposal," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 983-994, December.
  4. Anthony Garratt & Gary Koop & Shaun P. Vahey, 2006. "Forecasting Substantial Data Revisions in the Presence of Model Uncertainty," Birkbeck Working Papers in Economics and Finance 0617, Birkbeck, Department of Economics, Mathematics & Statistics.
  5. repec:nsr:niesrd:303 is not listed on IDEAS
  6. Jana Eklund & Sune Karlsson, 2007. "Forecast Combination and Model Averaging Using Predictive Measures," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 329-363.
  7. Timmermann, Allan G, 2005. "Forecast Combinations," CEPR Discussion Papers 5361, C.E.P.R. Discussion Papers.
  8. Anne Sofie Jore & James Mitchell & Shaun P. Vahey, 2010. "Combining forecast densities from VARs with uncertain instabilities," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 621-634.
  9. Cees Diks & Valentyn Panchenko & Dick van Dijk, 2008. "Partial Likelihood-Based Scoring Rules for Evaluating Density Forecasts in Tails," Discussion Papers 2008-10, School of Economics, The University of New South Wales.
  10. Andersson, Michael K & Karlsson, Sune, 2007. "Bayesian forecast combination for VAR models," Working Paper Series 216, Sveriges Riksbank (Central Bank of Sweden).
  11. Geweke, John & Amisano, Gianni, 2011. "Optimal prediction pools," Journal of Econometrics, Elsevier, vol. 164(1), pages 130-141, September.
  12. Gianni Amisano & Raffaella Giacomini, 2005. "Comparing Density Forecsts via Weighted Likelihood Ratio Tests," Working Papers ubs0504, University of Brescia, Department of Economics.
  13. Corradi, Valentina & Swanson, Norman R., 2006. "Predictive Density Evaluation," Handbook of Economic Forecasting, Elsevier.
  14. Todd E. Clark & Michael W. McCracken, 2008. "Averaging forecasts from VARs with uncertain instabilities," Working Papers 2008-030, Federal Reserve Bank of St. Louis.
  15. Wallis, Kenneth F., 2002. "Chi-squared tests of interval and density forecasts, and the Bank of England's fan charts," Royal Economic Society Annual Conference 2002 181, Royal Economic Society.
  16. Garratt, Anthony & Koop, Gary & Mise, Emi & Vahey, Shaun P., 2009. "Real-Time Prediction With U.K. Monetary Aggregates in the Presence of Model Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 480-491.
  17. Cees Diks & Valentyn Panchenko & Dick van Dijk, 2008. "Partial Likelihood-Based Scoring Rules for Evaluating Density Forecasts in Tails," Tinbergen Institute Discussion Papers 08-050/4, Tinbergen Institute.
  18. Peter A. Morris, 1974. "Decision Analysis Expert Use," Management Science, INFORMS, vol. 20(9), pages 1233-1241, May.
  19. Hall, Stephen G. & Mitchell, James, 2007. "Combining density forecasts," International Journal of Forecasting, Elsevier, vol. 23(1), pages 1-13.
  20. Valentina Corradi & Andres Fernandez & Norman Swanson, 2008. "Information in the revision process of real-time datasets," Working Papers 08-27, Federal Reserve Bank of Philadelphia.
  21. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  22. Peter A. Morris, 1977. "Combining Expert Judgments: A Bayesian Approach," Management Science, INFORMS, vol. 23(7), pages 679-693, March.
  23. Michael P. Clements, 2004. "Evaluating the Bank of England Density Forecasts of Inflation," Economic Journal, Royal Economic Society, vol. 114(498), pages 844-866, October.
  24. Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
  25. repec:nsr:niesrd:320 is not listed on IDEAS
  26. Dean Croushore & Tom Stark, 1999. "A real-time data set for macroeconomists," Working Papers 99-4, Federal Reserve Bank of Philadelphia.
  27. Geweke, John & Whiteman, Charles, 2006. "Bayesian Forecasting," Handbook of Economic Forecasting, Elsevier.
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