Forecast Combination Based on Multiple Encompassing Tests in a Macroeconomic DSGE-VAR System

Mauro Costantini, Ulrich Gunter and Robert Kunst ()
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Ulrich Gunter: Austrian National Bank, Vienna, Austria

No 292, Economics Series from Institute for Advanced Studies

Abstract: We study the benefits of forecast combinations based on forecast-encompassing tests relative to uniformly weighted forecast averages across rival models. For a realistic simulation design, we generate multivariate time-series samples of size 40 to 200 from a macroeconomic DSGE-VAR model. Constituent forecasts of the combinations are formed from four linear autoregressive specifications, one of them a more sophisticated factor-augmented vector autoregression (FAVAR). The forecaster is assumed not to know the true data-generating model. Results depend on the prediction horizon. While one-step prediction fails to support test-based combinations at all sample sizes, the test-based procedure clearly dominates at prediction horizons greater than two.

Keywords: Combining forecasts; encompassing tests; model selection; time series; DGSE-VAR model (search for similar items in EconPapers)
JEL-codes: C15 C32 C53 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2012-10
New Economics Papers: this item is included in nep-dge, nep-ets and nep-for
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https://irihs.ihs.ac.at/id/eprint/2169 First version, 2012 (application/pdf)

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