Predicting Time-Varying Parameters with Parameter-Driven and Observation-Driven Models

37 Pages Posted: 6 Mar 2012

See all articles by Siem Jan Koopman

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Andre Lucas

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute

Marcel Scharth

The University of Sydney

Date Written: March 5, 2012

Abstract

We study whether and when parameter-driven time-varying parameter models lead to forecasting gains over observation-driven models. We consider dynamic count, intensity, duration, volatility and copula models, including new specifications that have not been studied earlier in the literature. In an extensive Monte Carlo study, we find that observation-driven generalised autoregressive score (GAS) models have similar predictive accuracy to correctly specified parameter-driven models. In most cases, differences in mean squared errors are smaller than 1% and model confidence sets have low power when comparing these two alternatives. We also find that GAS models outperform many familiar observation-driven models in terms of forecasting accuracy. The results point to a class of observation-driven models with comparable forecasting ability to parameter-driven models, but lower computational complexity.

Keywords: Generalised autoregressive score model, Importance sampling, Model confidence set, Nonlinear state space model, Weibull-gamma mixture

JEL Classification: C53, C58, C22

Suggested Citation

Koopman, Siem Jan and Lucas, Andre and Scharth, Marcel, Predicting Time-Varying Parameters with Parameter-Driven and Observation-Driven Models (March 5, 2012). Available at SSRN: https://ssrn.com/abstract=2016266 or http://dx.doi.org/10.2139/ssrn.2016266

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Andre Lucas

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

Marcel Scharth (Contact Author)

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

HOME PAGE: http://www.marcelscharth.com

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