Forecasting with equilibrium-correction models during structural breaks

Jennifer L. Castle (), Nicholas Fawcett and David F. Hendry ()

Journal of Econometrics, 2010, vol. 158, issue 1, pages 25-36

Abstract: When location shifts occur, cointegration-based equilibrium-correction models (EqCMs) face forecasting problems. We consider alleviating such forecast failure by updating, intercept corrections, differencing, and estimating the future progress of an 'internal' break. Updating leads to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, but helps when collinearities are changed by an 'external' break with the EqCM staying constant. Both mechanistic corrections help compared to retaining a pre-break estimated model, but an estimated model of the break process could outperform. We apply the approaches to EqCMs for UK M1, compared with updating a learning function as the break evolves.

Keywords: Cointegration; Equilibrium-correction; Forecasting; Location; shifts; Collinearity; M1 (search for similar items in EconPapers)
Date: 2010
References: Add references at CitEc
Citations View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6VC0 ... d30882ee14a337845e4f
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Forecasting with Equilibrium-correction Models during Structural Breaks (2008)
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: http://EconPapers.repec.org/RePEc:eee:econom:v:158:y:2010:i:1:p:25-36

Access Statistics for this article

Journal of Econometrics is edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

More articles in Journal of Econometrics from Elsevier
Series data maintained by Jeroen Loos ().