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The Contribution of Structural Break Models to Forecasting Macroeconomic Series

Author

Listed:
  • Luc Bauwens

    (Université catholique de Louvain, CORE)

  • Gary Koop

    (University of Strathclyde)

  • Dimitris Korobilis

    (Université catholique de Louvain, CORE)

  • Jeroen V.K. Rombouts

    (Institute of Applied Economics at HEC Montréal, CIRANO, CIRPEE; Université catholique de Louvain, CORE)

Abstract

This paper compares the forecasting performance of different models which have been proposed for forecasting in the presence of structural breaks. These models differ in their treatment of the break process, the model which applies in each regime and the out-of-sample probability of a break occurring. In an extensive empirical evaluation involving many important macroeconomic time series, we demonstrate the presence of structural breaks and their importance for forecasting in the vast majority of cases. We find no single forecasting model consistently works best in the presence of structural breaks. In many cases, the formal modeling of the break process is important in achieving good forecast performance. However, there are also many cases where simple, rolling window based forecasts perform well.

Suggested Citation

  • Luc Bauwens & Gary Koop & Dimitris Korobilis & Jeroen V.K. Rombouts, 2011. "The Contribution of Structural Break Models to Forecasting Macroeconomic Series," Working Paper series 38_11, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:38_11
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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