Advances in Forecasting Under Instability

141 Pages Posted: 28 Sep 2011 Last revised: 27 Sep 2013

See all articles by Barbara Rossi

Barbara Rossi

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Barcelona Graduate School of Economics

Date Written: June 30, 2012

Abstract

The forecasting literature has identi…ed two important issues: (i) several predictors have substantial and statistically signi…cant predictive content, although only sporadically, and it is unclear whether this predictive content can be exploited reliably; (ii) in-sample predictive content does not necessarily translate into out-of-sample predictive ability, nor ensures the stability of the predictive relationship over time. The objective of this chapter is to understand what we have learned about forecasting in the presence of instabilities. The empirical evidence raises a multitude of questions. If in-sample tests provide poor guidance to out-of-sample forecasting ability, what should researchers do? If there are statistically signi…cant instabilities in Granger-causality relationships, how do researchers establish whether there is any Granger-causality at all? If there is substantial instability in predictive relationships, how do researchers establish which model is the “best”forecasting model? And fi…nally, if a model forecasts poorly, why is that and how should researchers proceed to improve the forecasting models? In this chapter, we answer these questions by discussing various methodologies for inference as well as estimation that have been recently proposed in the literature.

JEL Classification: C53, C22, C01, E2, E27, E37

Suggested Citation

Rossi, Barbara, Advances in Forecasting Under Instability (June 30, 2012). Economic Research Initiatives at Duke (ERID) Working Paper No. 111. Available at SSRN: https://ssrn.com/abstract=1934348

Barbara Rossi (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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