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Modelling methodology and forecast failure

Michael Clements and David Hendry ()

Econometrics Journal, 2002, vol. 5, issue 2, 319-344

Abstract: We analyse by simulation the impact of model-selection strategies (sometimes called pre-testing) on forecast performance in both constant-and non-constant-parameter processes. Restricted, unrestricted and selected models are compared when either of the first two might generate the data. We find little evidence that strategies such as general-to-specific induce significant over-fitting, or thereby cause forecast-failure rejection rates to greatly exceed nominal sizes. Parameter non-constancies put a premium on correct specification, but in general, model-selection effects appear to be relatively small, and progressive research is able to detect the mis-specifications. Copyright Royal Economic Society, 2002

Date: 2002
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Econometrics Journal is currently edited by Richard J. Smith, Oliver Linton, Pierre Perron, Jaap Abbring and Marius Ooms

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