Nonlinearity, Nonstationarity and Spurious Forecasts

Vadim Marmer ()

Econometrics from EconWPA

Abstract: Implications of nonlinearity, nonstationarity and misspecification are considered from a forecasting perspective. My model allows for small departures from the martingale difference sequence hypothesis by including a nonlinear component, formulated as a general, integrable transformation of the I(1) predictor. I assume that the true generating mechanism is unknown to the econometrician and he is therefore forced to use some approximating functions. I show that the usual regression techniques lead to spurious forecasts. Improvements of the forecast accuracy are possible with properly chosen nonlinear transformations of the predictor. The paper derives the limiting distribution of the forecasts’ MSE. In the case of square integrable approximants, it depends on the L2-distance between the nonlinear component and approximating function. Optimal forecasts are available for a given class of approximants.

Keywords: forecasting; integrated time series; misspecified models; nonlinear transformations; stock returns; dividend-price ratio. (search for similar items in EconPapers)
JEL-codes: C22 C53 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-fin
Date: 2005-03-05, Revised 2005-12-15
Note: Type of Document - pdf; pages: 51
View citations in EconPapers

Downloads: (external link)
http://129.3.20.41/eps/em/papers/0503/0503002.pdf (application/pdf)

Related works:
Working Paper: Nonlinearity, Nonstationarity, and Spurious Forecasts (2009)
Journal Article: Nonlinearity, nonstationarity, and spurious forecasts (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:wpa:wuwpem:0503002

Access Statistics for this paper

More papers in Econometrics from EconWPA
Series data maintained by EconWPA ().