A robust approach to tilting: parametric relative entropy

Carlos Montes-Galdón, Joan Paredes () and Elias Wolf
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Carlos Montes-Galdón: European Central Bank
Joan Paredes: National Bank of Slovakia
Elias Wolf: European Stability Mechanism Bank and Universitat Bonn

No WP 2/2026, Working and Discussion Papers from Research Department, National Bank of Slovakia

Abstract: We introduce a novel methodology, †parametric tilting,†for incorporating external information into econometric model-based density forecasts. Unlike traditional entropic tilting, which can generate unrealistic or unstable distributions under certain conditions, parametric tilting ensures more reliable and numerically stable results. Our approach leverages the flexibility of the skew-T distribution, which captures key moments of macroeconomic time series, and minimizes the Kullback-Leibler divergence between the target and model-based distributions. This method overcomes limitations of entropic tilting, such as multimodal or degenerate distributions, providing a robust alternative for policymakers and researchers aiming to integrate external views into probabilistic forecasting frameworks.

JEL-codes: C14 C53 E52 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2026-02
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Persistent link: https://EconPapers.repec.org/RePEc:svk:wpaper:1136

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