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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. Anne-Sofie Jore & James Mitchell & Shaun P. Vahey, 2008. "Combining forecast densities from VARs with uncertain instabilities," Working Paper 2008/01, Norges Bank.
  2. Geweke, John & Amisano, Gianni, 2011. "Optimal prediction pools," Journal of Econometrics, Elsevier, vol. 164(1), pages 130-141, September.
  3. 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.
  4. 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.
  5. 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.
  6. Dean Croushore & Tom Stark, 1999. "A real-time data set for macroeconomists," Working Papers 99-4, Federal Reserve Bank of Philadelphia.
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  8. Marco Aiolfi & Carlos Capistrán & Allan Timmermann, 2010. "Forecast Combinations," CREATES Research Papers 2010-21, School of Economics and Management, University of Aarhus.
  9. Anthony Garratt & Gary Koop & ShaunP. Vahey, 2008. "Forecasting Substantial Data Revisions in the Presence of Model Uncertainty," Economic Journal, Royal Economic Society, vol. 118(530), pages 1128-1144, 07.
  10. Amisano, Gianni & Giacomini, Raffaella, 2007. "Comparing Density Forecasts via Weighted Likelihood Ratio Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 177-190, April.
  11. 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.
  12. Andersson, Michael K & Karlsson, Sune, 2007. "Bayesian forecast combination for VAR models," Working Paper Series 216, Sveriges Riksbank (Central Bank of Sweden).
  13. Norman R. Swanson & Valentina Corradi & Andres Fernandez, 2011. "Information in the Revision Process of Real-Time Datasets," Departmental Working Papers 201107, Rutgers University, Department of Economics.
  14. Peter A. Morris, 1974. "Decision Analysis Expert Use," Management Science, INFORMS, vol. 20(9), pages 1233-1241, May.
  15. Anthony Garratt & Gary Koop & Emi Mise & Shaun Vahey, 2008. "Real-time Prediction with UK Monetary Aggregates in the Presence of Model Uncertainty," Reserve Bank of New Zealand Discussion Paper Series DP2008/13, Reserve Bank of New Zealand.
  16. repec:nsr:niesrd:320 is not listed on IDEAS
  17. Geweke, John & Whiteman, Charles, 2006. "Bayesian Forecasting," Handbook of Economic Forecasting, Elsevier.
  18. Todd E. Clark & Michael W. McCracken, 2008. "Averaging forecasts from VARs with uncertain instabilities," Working Papers 2008-030, Federal Reserve Bank of St. Louis.
  19. repec:nsr:niesrd:303 is not listed on IDEAS
  20. Dijk, D. van & Diks, C.G.H. & Panchenko, V., 2008. "Partial Likelihood-Based Scoring Rules for Evaluating Density Forecasts in Tails," CeNDEF Working Papers 08-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  21. Robert L. Winkler, 1981. "Combining Probability Distributions from Dependent Information Sources," Management Science, INFORMS, vol. 27(4), pages 479-488, April.
  22. 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.
  23. Peter A. Morris, 1977. "Combining Expert Judgments: A Bayesian Approach," Management Science, INFORMS, vol. 23(7), pages 679-693, March.
  24. Corradi, Valentina & Swanson, Norman R., 2006. "Predictive Density Evaluation," Handbook of Economic Forecasting, Elsevier.
  25. 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.
  26. Hall, Stephen G. & Mitchell, James, 2007. "Combining density forecasts," International Journal of Forecasting, Elsevier, vol. 23(1), pages 1-13.
  27. 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.
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