The effect of target function on the predictive performance of the two‐stage ridge estimator

Selma Toker and Nimet Özbay

Journal of Forecasting, 2019, vol. 38, issue 8, 749-772

Abstract: The main thrust of this study is to consider the problem of simultaneous prediction of actual and average values of the simultaneous equations model through the target function of Shalabh (Bulletin of International Statistical Institute, 1995, 56, 1375–1390). We focus on the predictive performance of the two‐stage ridge estimator with the motivation for eliminating the disorder arising from multicollinearity. An optimal biasing parameter of the two‐stage ridge estimator is derived by a minimization process of prediction mean square error. In addition, an optimal estimator for the weight of observed value in target function is attained theoretically. The results inferred from a numerical example and a Monte Carlo experiment provide a dramatic improvement in the predictive ability of the two‐stage ridge estimator.

Date: 2019
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https://doi.org/10.1002/for.2597

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jforec:v:38:y:2019:i:8:p:749-772

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