Forecast Accuracy and Economic Gains from Bayesian Model Averaging Using Time Varying Weights

Tinbergen Institute Discussion Paper 09-061/4

28 Pages Posted: 17 Jul 2009

See all articles by Lennart F. Hoogerheide

Lennart F. Hoogerheide

VU University Amsterdam

Richard Kleijn

affiliation not provided to SSRN

Francesco Ravazzolo

Free University of Bolzano

H. K. van Dijk

Tinbergen Institute; Econometric Institute

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Date Written: July 17, 2009

Abstract

Several Bayesian model combination schemes, including some novel approaches that simultaneously allow for parameter uncertainty, model uncertainty and robust time varying model weights, are compared in terms of forecast accuracy and economic gains using financial and macroeconomic time series. The results indicate that the proposed time varying model weight schemes outperform other combination schemes in terms of predictive and economic gains. In an empirical application using returns on the S&P 500 index, time varying model weights provide improved forecasts with substantial economic gains in an investment strategy including transaction costs. Another empirical example refers to forecasting US economic growth over the business cycle. It suggests that time varying combination schemes may be very useful in business cycle analysis and forecasting, as these may provide an early indicator for recessions.

Keywords: forecast combination, Bayesian model averaging, time varying model weights, portfolio optimization, business cycle

JEL Classification: C11, C15, C22, C53, G11

Suggested Citation

Hoogerheide, Lennart F. and Kleijn, Richard and Ravazzolo, Francesco and van Dijk, Herman K. and Verbeek, Marno, Forecast Accuracy and Economic Gains from Bayesian Model Averaging Using Time Varying Weights (July 17, 2009). Tinbergen Institute Discussion Paper 09-061/4. Available at SSRN: https://ssrn.com/abstract=1435232 or http://dx.doi.org/10.2139/ssrn.1435232

Lennart F. Hoogerheide (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Richard Kleijn

affiliation not provided to SSRN ( email )

Francesco Ravazzolo

Free University of Bolzano ( email )

Bolzano
Italy

Herman K. Van Dijk

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Burg. Oudlaan 50
Amsterdam/Rotterdam, 1082 MS
Netherlands
+31104088955 (Phone)
+31104089031 (Fax)

HOME PAGE: http://people.few.eur.nl/hkvandijk/

Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 4088955 (Phone)
+31 10 4527746 (Fax)

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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