Optimal Forecast Combination Under Regime Switching

Allan Timmermann and Graham Elliott ()

No 4649, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper proposes a new forecast combination method that lets the combination weights be driven by regime switching in a latent state variable. An empirical application that combines forecasts from survey data and time series models finds that the proposed regime switching combination scheme performs well for a variety of macroeconomic variables. Monte Carlo simulations shed light on the type of data generating processes for which the proposed combination method can be expected to perform better than a range of alternative combination schemes. Finally, we show how time-variations in the combination weights arise when the target variable and the predictors share a common factor structure driven by a hidden Markov process.

Keywords: Forecast combination; Time-varying combination weights; Markov switching; Survey data (search for similar items in EconPapers)
JEL-codes: C53 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (9)

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Journal Article: OPTIMAL FORECAST COMBINATION UNDER REGIME SWITCHING * (2005)
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