Nonlinearity, Nonstationarity and Spurious Forecasts

Vadim Marmer ()

Econometrics from University Library of Munich, Germany

Abstract: Implications of nonlinearity, nonstationarity and misspecification are considered from a forecasting perspective. My model allows for small departures from the martingale difference sequence hypothesis by including a nonlinear component, formulated as a general, integrable transformation of the I(1) predictor. I assume that the true generating mechanism is unknown to the econometrician and he is therefore forced to use some approximating functions. I show that the usual regression techniques lead to spurious forecasts. Improvements of the forecast accuracy are possible with properly chosen nonlinear transformations of the predictor. The paper derives the limiting distribution of the forecasts’ MSE. In the case of square integrable approximants, it depends on the L2-distance between the nonlinear component and approximating function. Optimal forecasts are available for a given class of approximants.

Keywords: forecasting; integrated time series; misspecified models; nonlinear transformations; stock returns; dividend-price ratio. (search for similar items in EconPapers)
JEL-codes: C22 C53 G14 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2005-03-05, Revised 2005-12-15
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-fin
Note: Type of Document - pdf; pages: 51
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Nonlinearity, Nonstationarity, and Spurious Forecasts (2009)
Journal Article: Nonlinearity, nonstationarity, and spurious forecasts (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpem:0503002

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