Cointegration and Long-Horizon Forecasting
University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES
Francis X. Diebold
University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)
IMF Working Paper No. 97/61
Imposing cointegration on a forecasting system, if cointegration is present, is believed to improve long-horizon forecasts. Contrary to this belief, at long horizons nothing is lost by ignoring cointegration when the forecasts are evaluated using standard mutivariate forecast accuracy measures. In fact, simple univariate Box-Jenkins forecasts are just as accurate. Our results highlight a potentially important deficiency of standard forecast accuracy measures-they fail to value the maintenance of cointegrating relationships among variables-and we suggest alternatives tht explicitly do so.
Number of Pages in PDF File: 30
JEL Classification: C32, C53working papers series
Date posted: January 22, 1998
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