Theory-coherent forecasting

Raffaella Giacomini () and Giuseppe Ragusa ()

Journal of Econometrics, 2014, vol. 182, issue 1, 145-155

Abstract: We consider a method for producing multivariate density forecasts that satisfy moment restrictions implied by economic theory, such as Euler conditions. The method starts from a base forecast that might not satisfy the theoretical restrictions and forces it to satisfy the moment conditions using exponential tilting. Although exponential tilting has been considered before in a Bayesian context (Robertson et al. 2005), our main contributions are: (1) to adapt the method to a classical inferential context with out-of-sample evaluation objectives and parameter estimation uncertainty; and (2) to formally discuss the conditions under which the method delivers improvements in forecast accuracy. An empirical illustration which incorporates Euler conditions into forecasts produced by Bayesian vector autoregressions shows that the improvements in accuracy can be sizable and significant.

Keywords: Density forecast; Forecast evaluation; Semiparametric projections; Exponential titling (search for similar items in EconPapers)
JEL-codes: C14 C22 C53 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:182:y:2014:i:1:p:145-155

DOI: 10.1016/j.jeconom.2014.04.014

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