Forecasting in the presence of recent structural change

Jana Eklund, George Kapetanios () and Simon Glover Price ()
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George Kapetanios: Queen Mary College, London

No 406, Bank of England working papers from Bank of England

Abstract: We examine how to forecast after a recent break. We consider monitoring for change and then combining forecasts from models that do and do not use data before the change; and robust methods, namely rolling regressions, forecast averaging over different windows and exponentially weighted moving average (EWMA) forecasting. We derive analytical results for the performance of the robust methods relative to a full-sample recursive benchmark. For a location model subject to stochastic breaks the relative mean square forecast error ranking is EWMA < rolling regression < forecast averaging. No clear ranking emerges under deterministic breaks. In Monte Carlo experiments forecast averaging improves performance in many cases with little penalty where there are small or infrequent changes. Similar results emerge when we examine a large number of UK and US macroeconomic series.

Keywords: monitoring; recent structural change; forecast combination; robust forecasts (search for similar items in EconPapers)
JEL-codes: C10 C59 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets and nep-for
Date: 2010-12-02
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Working Paper: Forecasting in the presence of recent structural change (2011)
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Persistent link: http://EconPapers.repec.org/RePEc:boe:boeewp:0406

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