Does the Box-Cox transformation help in forecasting macroeconomic time series?

Tommaso Proietti and Luetkepohl Helmut
Authors registered in the RePEc Author Service: Helmut Lütkepohl

MPRA Paper from University Library of Munich, Germany

Abstract: The paper investigates whether transforming a time series leads to an improvement in forecasting accuracy. The class of transformations that is considered is the Box-Cox power transformation, which applies to series measured on a ratio scale. We propose a nonparametric approach for estimating the optimal transformation parameter based on the frequency domain estimation of the prediction error variance, and also conduct an extensive recursive forecast experiment on a large set of seasonal monthly macroeconomic time series related to industrial production and retail turnover. In about one fifth of the series considered the Box-Cox transformation produces forecasts significantly better than the untransformed data at one-step-ahead horizon; in most of the cases the logarithmic transformation is the relevant one. As the forecast horizon increases, the evidence in favour of a transformation becomes less strong. Typically, the na¨ıve predictor that just reverses the transformation leads to a lower mean square error than the optimal predictor at short forecast leads. We also discuss whether the preliminary in-sample frequency domain assessment conducted provides a reliable guidance which series should be transformed for improving significantly the predictive performance.

Keywords: Forecasts comparisons; Multi-step forecasting; Rolling forecasts; Nonparametric estimation of prediction error variance. (search for similar items in EconPapers)
JEL-codes: C14 C22 C52 C53 (search for similar items in EconPapers)
Date: 2011-07-18
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Does the Box–Cox transformation help in forecasting macroeconomic time series? (2013)
Working Paper: Does the Box-Cox Transformation Help in Forecasting Macroeconomic Time Series? (2011)
Working Paper: Does the Box-Cox transformation help in forecasting macroeconomic time series? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:32294

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