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Forecasting using Bayesian and Information Theoretic Model Averaging: An Application to UK Inflation

  • George Kapetanios

    ()

    (Queen Mary, University of London)

  • Vincent Labhard

    ()

    (Bank of England)

  • Simon Price

    ()

    (Bank of England)

In recent years there has been increasing interest in forecasting methods that utilise large datasets, driven partly by the recognition that policymaking institutions need to process large quantities of information. Factor analysis is one popular way of doing this. Forecast combination is another, and it is on this that we concentrate. Bayesian model averaging methods have been widely advocated in this area, but a neglected frequentist approach is to use information theoretic based weights. We consider the use of model averaging in forecasting UK inflation with a large dataset from this perspective. We find that an information theoretic model averaging scheme can be a powerful alternative both to the more widely used Bayesian model averaging scheme and to factor models.

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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp566.pdf
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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 566.

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Date of creation: Sep 2006
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Handle: RePEc:qmw:qmwecw:wp566
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  1. David Hendry & Michael Clements, 2001. "Pooling of Forecasts," Economics Series Working Papers 2002-W09, University of Oxford, Department of Economics.
  2. James H. Stock & Mark W.Watson, 2003. "Forecasting Output and Inflation: The Role of Asset Prices," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 788-829, September.
  3. George Kapetanios, 2005. "Variable Selection using Non-Standard Optimisation of Information Criteria," Working Papers 533, Queen Mary University of London, School of Economics and Finance.
  4. 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.
  5. Jonathan H. Wright, 2003. "Bayesian Model Averaging and exchange rate forecasts," International Finance Discussion Papers 779, Board of Governors of the Federal Reserve System (U.S.).
  6. Min, C.K. & Zellner, A., 1992. ""Bayesian and Non-Bayesian Methods for Combining Models and Forecasts with Applications to Forecasting International Growth Rates"," Papers 90-92-23, California Irvine - School of Social Sciences.
  7. 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.
  8. Gary Koop & Simon Potter, 2003. "Forecasting in Large Macroeconomic Panels using Bayesian Model Averaging," Discussion Papers in Economics 04/16, Department of Economics, University of Leicester.
  9. repec:cup:cbooks:9780521634809 is not listed on IDEAS
  10. Carmen Fernandez & E Ley & Mark F J Steel, 2004. "Benchmark priors for Bayesian models averaging," ESE Discussion Papers 66, Edinburgh School of Economics, University of Edinburgh.
  11. Stock, James H. & Watson, Mark W., 2006. "Forecasting with Many Predictors," Handbook of Economic Forecasting, Elsevier.
  12. Corradi, Valentina & Swanson, Norman R., 2006. "Predictive Density Evaluation," Handbook of Economic Forecasting, Elsevier.
  13. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  14. Jonathan H. Wright, 2009. "Forecasting US inflation by Bayesian model averaging," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(2), pages 131-144.
  15. Krolzig, Hans-Martin & Hendry, David F., 2001. "Computer automation of general-to-specific model selection procedures," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 831-866, June.
  16. 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.
  17. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  18. Ashley, Richard, 1998. "A new technique for postsample model selection and validation," Journal of Economic Dynamics and Control, Elsevier, vol. 22(5), pages 647-665, May.
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