A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series

Massimiliano Marcellino, James H. Stock and Mark W Watson

No 4976, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: ‘Iterated’ multiperiod ahead time series forecasts are made using a one-period ahead model, iterated forward for the desired number of periods, whereas ‘direct’ forecasts are made using a horizon-specific estimated model, where the dependent variable is the multi-period ahead value being forecasted. Which approach is better is an empirical matter: in theory, iterated forecasts are more efficient if correctly specified, but direct forecasts are more robust to model misspecification. This paper compares empirical iterated and direct forecasts from linear univariate and bivariate models by applying simulated out-of-sample methods to 171 US monthly macroeconomic time series spanning 1959-2002. The iterated forecasts typically outperform the direct forecasts, particularly if the models can select long lag specifications. The relative performance of the iterated forecasts improves with the forecast horizon.

Keywords: forecast comparisons; multistep forecasts; VAR forecasts (search for similar items in EconPapers)
JEL-codes: C32 E37 E47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-mac
Date: 2005-03
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Related works:
Working Paper: A Comparison of Direct and Iterated Multistep AR Methods for Forecasting Macroeconomic Time Series (2005)
Journal Article: A comparison of direct and iterated multistep AR methods for forecasting macroeconomic time series (2006)
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