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Incorporating theoretical restrictions into forecasting by projection methods

Raffaella Giacomini () and Giuseppe Ragusa

No 8604, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose a method for modifying a given density forecast in a way that incorporates the information contained in theory-based moment conditions. An example is "improving" the forecasts from atheoretical econometric models, such as factor models or Bayesian VARs, by ensuring that they satisfy theoretical restrictions given for example by Euler equations or Taylor rules. The method yields a new density (and thus point-) forecast which has a simple and convenient analytical expression and which by construction satisfies the theoretical restrictions. The method is flexible and can be used in the realistic situation in which economic theory does not specify a likelihood for the variables of interest, and thus cannot be readily used for forecasting.

Keywords: Bayesian VAR; Euler conditions; Exponential tilting; Forecast comparisons (search for similar items in EconPapers)
JEL-codes: C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cis, nep-ecm, nep-ets and nep-for
Date: 2011-10
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Working Paper: Incorporating theoretical restrictions into forecasting by projection methods (2012) Downloads
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