The Forecast Combination Puzzle: A Simple Theoretical Explanation

Gerda Claeskens, Jan Magnus (), Andrey Vasnev and Wendun Wang
Additional contact information
Gerda Claeskens: KU Leuven, Belgium
Wendun Wang: Erasmus University, Rotterdam, the Netherlands

No 14-127/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This papers offers a theoretical explanation for the stylized fact that forecast combinations with estimated optimal weights often perform poorly in applications. The properties of the forecast combination are typically derived under the assumption that the weights are fixed, while in practice they need to be estimated. If the fact that the weights are random rather than fixed is taken into account during the optimality derivation, then the forecast combination will be biased (even when the original forecasts are unbiased) and its variance is larger than in the fixed-weights case. In particular, there is no guarantee that the 'optimal' forecast combination will be better than the equal-weights case or even improve on the original forecasts. We provide the underlying theory, some special cases and an application in the context of model selection.

Keywords: forecast combination; optimal weights; model selection (search for similar items in EconPapers)
JEL-codes: C52 C53 (search for similar items in EconPapers)
Date: 2014-09-19
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://papers.tinbergen.nl/14127.pdf (application/pdf)

Related works:
Journal Article: The forecast combination puzzle: A simple theoretical explanation (2016)
Working Paper: The forecast combination puzzle: a simple theoretical explanation (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20140127

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().