Forecasting with equilibrium-correction models during structural breaks

Jennifer Castle, Nicholas Fawcett and David Hendry

Journal of Econometrics, 2010, vol. 158, issue 1, 25-36

Abstract: When location shifts occur, cointegration-based equilibrium-correction models (EqCMs) face forecasting problems. We consider alleviating such forecast failure by updating, intercept corrections, differencing, and estimating the future progress of an 'internal' break. Updating leads to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, but helps when collinearities are changed by an 'external' break with the EqCM staying constant. Both mechanistic corrections help compared to retaining a pre-break estimated model, but an estimated model of the break process could outperform. We apply the approaches to EqCMs for UK M1, compared with updating a learning function as the break evolves.

Keywords: Cointegration; Equilibrium-correction; Forecasting; Location; shifts; Collinearity; M1 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (38)

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Working Paper: Forecasting with Equilibrium-correction Models during Structural Breaks (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:158:y:2010:i:1:p:25-36

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