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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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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. 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.
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  13. Gneiting, Tilmann & Raftery, Adrian E., 2007. "Strictly Proper Scoring Rules, Prediction, and Estimation," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 359-378, March.
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  29. Hall, Stephen G. & Mitchell, James, 2007. "Combining density forecasts," International Journal of Forecasting, Elsevier, vol. 23(1), pages 1-13.
  30. Dr. James Mitchell, 2005. "Evaluating, comparing and combining density forecasts using the KLIC with an application to the Bank of England and NIESR ÔfanÕ charts of inflation," NIESR Discussion Papers 253, National Institute of Economic and Social Research.
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