Forecasting with Difference-Stationary and Trend-Stationary Models

David F. Hendry () and Michael Peter Clements

No 5, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Although difference-stationary (DS) and trend-stationary (TS) processes have been subject to considerable analysis, there are no direct comparisons for each being the data-generation process (DGP). We examine incorrect choice between these models for forecasting for both known and estimated parameters. Three sets of Monte Carlo simulations illustrate the analysis, to evaluate the biases in conventional standard errors when each model is mis-specified, compute the relative mean-square forecast errors of the two models for both DGPs, and investigate autocorrelated errors, so both models can better approximate the converse GDP. The outcomes are surprisingly different from established results.

Keywords: difference stationary; trend stationary; forecastability (search for similar items in EconPapers)
JEL-codes: C32 C53 (search for similar items in EconPapers)
Date: 2000
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Related works:
Working Paper: Forecasting with Difference-Stationary and Trend-Stationary Models (1998)
Journal Article: Forecasting with difference-stationary and trend-stationary models (2001)
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