Forecasting in the Presence of Recent Structural Change

49 Pages Posted: 5 Dec 2010

See all articles by Jana Eklund

Jana Eklund

Bank of England - Monetary Analysis

George Kapetanios

King's College, London

Simon Price

Essex Business School; City University London - Department of Economics

Date Written: December 2, 2010

Abstract

We examine how to forecast after a recent break. We consider monitoring for change and then combining forecasts from models that do and do not use data before the change; and robust methods, namely rolling regressions, forecast averaging over different windows and exponentially weighted moving average (EWMA) forecasting. We derive analytical results for the performance of the robust methods relative to a full-sample recursive benchmark. For a location model subject to stochastic breaks the relative mean square forecast error ranking is EWMA < rolling regression < forecast averaging. No clear ranking emerges under deterministic breaks. In Monte Carlo experiments forecast averaging improves performance in many cases with little penalty where there are small or infrequent changes. Similar results emerge when we examine a large number of UK and US macroeconomic series.

Keywords: monitoring, recent structural change, forecast combination, robust forecasts

JEL Classification: C10, C59

Suggested Citation

Eklund, Jana and Kapetanios, George and Price, Simon G., Forecasting in the Presence of Recent Structural Change (December 2, 2010). Bank of England Working Paper No. 406, Available at SSRN: https://ssrn.com/abstract=1719070 or http://dx.doi.org/10.2139/ssrn.1719070

Jana Eklund

Bank of England - Monetary Analysis ( email )

Threadneedle Street
MA-3, HO-2(A-B)
London EC2R 8AH
United Kingdom
+44 20 7601 3267 (Phone)

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Simon G. Price (Contact Author)

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

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