How Costly is it to Ignore Breaks when Forecasting the Direction of a Time Series?

Mohammad Pesaran and Allan Timmermann

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Empirical evidence suggests that many macroeconomic and financial time-series are subject to occasional structural breaks. In this paper we present analytical results quantifying the effects of such breaks on the correlation between the forecast and the realisation, and on the ability to forecast the sign or direction of a time-series that is subject to breaks. Our results suggest that it can be very costly to ignore breaks. Forecasting approaches that condition on the most recent break are likely to perform better over unconditional approaches that use expanding or rolling estimation windows, provided that the break is reasonably large.

Keywords: sign prediction; estimation window; structural breaks (search for similar items in EconPapers)
JEL-codes: C22 G10 (search for similar items in EconPapers)
Pages: 34
Date: 2003-01
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-rmg
Note: EM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: How costly is it to ignore breaks when forecasting the direction of a time series? (2004)
Working Paper: How Costly is it to Ignore Breaks when Forecasting the Direction of a Time Series? (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0306

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