Forecast Combination Based on Multiple Encompassing Tests in a Macroeconomic DSGE System

Mauro Costantini, Ulrich Gunter and Robert Kunst ()
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Ulrich Gunter: Department of Economics, University of Vienna, Vienna, Austria

No 251, Economics Series from Institute for Advanced Studies

Abstract: We use data generated by a macroeconomic DSGE model to study the relative benefits of forecast combinations based on forecast-encompassing tests relative to simple uniformly weighted forecast averages across rival models. Assumed rival models are four linear autoregressive specifications, one of them a more sophisticated factor-augmented vector autoregression (FAVAR). The forecaster is assumed not to know the true data-generating DSGE model. The results critically depend on the prediction horizon. While one-step prediction hardly supports test-based combinations, the test-based procedure attains a clear lead at prediction horizons greater than two.

Keywords: Combining forecasts; encompassing tests; model selection; time series; DSGE model (search for similar items in EconPapers)
JEL-codes: C15 C32 C53 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2010-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ecm, nep-ets and nep-for
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