Forecasting an Aggregate in the Presence of Structural Breaks in the Disaggregates
William Larson ()
No 2015-002, Working Papers from The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting
There is a debate in the literature on the best method to forecast an aggregate: (1) forecast the aggregate directly, (2) forecast the disaggregates and then aggregate, or (3) forecast the aggregate using disaggregate information. This paper contributes to this debate by suggesting that in the presence of moderate-sized structural breaks in the disaggregates, approach (2) is preferred because of the low power to detect mean shifts in the disaggregates using models of aggregates. In support of this approach are two exercises. First, a simple Monte Carlo study demonstrates theoretical forecasting improvements. Second, empirical evidence is given using pseudo-ex ante forecasts of aggregate proven oil reserves in the United States.
Keywords: Model selection; Intercept correction; Forecast robustification (search for similar items in EconPapers)
JEL-codes: C52 C53 Q3 (search for similar items in EconPapers)
Pages: 31 pages
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:gwc:wpaper:2015-002
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