Incorporating Theoretical Restrictions into Forecasting by Projection Methods

28 Pages Posted: 1 Nov 2011

See all articles by Raffaella Giacomini

Raffaella Giacomini

University College London - Department of Economics; University of California, Los Angeles - Department of Economics

Giuseppe Ragusa

University of Pisa - Department of Economics and Management

Date Written: October 2011

Abstract

We propose a method for modifying a given density forecast in a way that incorporates the information contained in theory-based moment conditions. An example is "improving" the forecasts from atheoretical econometric models, such as factor models or Bayesian VARs, by ensuring that they satisfy theoretical restrictions given for example by Euler equations or Taylor rules. The method yields a new density (and thus point-) forecast which has a simple and convenient analytical expression and which by construction satisfies the theoretical restrictions. The method is flexible and can be used in the realistic situation in which economic theory does not specify a likelihood for the variables of interest, and thus cannot be readily used for forecasting.

Keywords: Bayesian VAR, Euler conditions, Exponential tilting, Forecast comparisons

JEL Classification: C53

Suggested Citation

Giacomini, Raffaella and Ragusa, Giuseppe, Incorporating Theoretical Restrictions into Forecasting by Projection Methods (October 2011). CEPR Discussion Paper No. DP8604. Available at SSRN: https://ssrn.com/abstract=1952471

Raffaella Giacomini (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

University of California, Los Angeles - Department of Economics ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095-1361
United States

Giuseppe Ragusa

University of Pisa - Department of Economics and Management ( email )

Italy

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