A New Nonparametric Combination Forecasting with Structural Breaks

Zongwu Cai, Gunawan Gunawan and Yuying Sun
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Zongwu Cai: Department of Economics, The University of Kansas, Lawrence, KS 66045, USA
Gunawan Gunawan: Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta 55281, Indonesia
Yuying Sun: Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing 100190, China

No 202412, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: This paper proposes a new nonparametric forecasting procedure based on a weighted local linear estimator for a nonparametric model with structural breaks. The proposed method assigns a weight based on both the distance of observations to the predictor covariates and their location in time and the weight is chosen using multifold forward-validation to account for time series data. We investigate the asymptotic properties of the proposed estimator and show that the weight estimated by the multifold forward-validation is asymptotically optimal in the sense of achieving the lowest possible out-of-sample prediction risk. Additionally, a nonparametric method is adopted to estimate the break date and the proposed approach allows for different features of predictors before and after break. A Monte Carlo simulation study is conducted to provide evidence for the forecasting outperformance of the proposed method over the regular nonparametric post-break and full-sample estimators. Finally, an empirical application to volatility forecasting compares several popular parametric and nonparametric methods, including the proposed weighted local linear estimator, demonstrating its superiority over other alternative methods.

Keywords: Combination Forecasting; Model Averaging; multifold forward-validation; Nonparametric Model; Structural Break Model; Weighted Local Linear Fitting (search for similar items in EconPapers)
JEL-codes: C14 C22 C53 (search for similar items in EconPapers)
Date: 2024-09, Revised 2024-09
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for, nep-mac and nep-sea
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