Smooth Robust Multi-Horizon Forecasts

Andrew Martinez, Jennifer Castle and David Hendry

A chapter in Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling, 2022, vol. 43A, pp 143-165 from Emerald Group Publishing Limited

Abstract: We investigate whether smooth robust methods for forecasting can help mitigate pronounced and persistent failure across multiple forecast horizons. We demonstrate that naive predictors are interpretable as local estimators of the long-run relationship with the advantage of adapting quickly after a break, but at a cost of additional forecast error variance. Smoothing over naive estimates helps retain these advantages while reducing the costs, especially for longer forecast horizons. We derive the performance of these predictors after a location shift, and confirm the results using simulations. We apply smooth methods to forecasts of UK productivity and US 10-year Treasury yields and show that they can dramatically reduce persistent forecast failure exhibited by forecasts from macroeconomic models and professional forecasters.

Keywords: Equilibrium-correction; location shifts; long differencing; productivity forecasts; random walk; robust forecasts; C51; C53 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Smooth Robust Multi-Horizon Forecasts (2021)
Working Paper: Smooth Robust Multi-Horizon Forecasts (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-90532021000043a008

DOI: 10.1108/S0731-90532021000043A008

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