Adaptive Forecasting in the Presence of Recent and Ongoing Structural Change

38 Pages Posted: 5 Apr 2014

See all articles by Liudas Giraitis

Liudas Giraitis

Queen Mary

George Kapetanios

King's College, London

Simon Price

Essex Business School; City University London - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2014

Abstract

We consider time series forecasting in the presence of ongoing structural change where both the time-series dependence and the nature of the structural change are unknown. Methods that downweight older data, such as rolling regressions, forecast averaging over different windows and exponentially weighted moving averages, known to be robust to historical structural change, are found also to be useful in the presence of ongoing structural change in the forecast period. A crucial issue is how to select the degree of downweighting, usually defined by an arbitrary tuning parameter. We make this choice data-dependent by minimising forecast mean square error, and provide a detailed theoretical analysis of our proposal. Monte Carlo results illustrate the methods. We examine their performance on 97 US macro series. Forecasts using data-based tuning of the data discount rate are shown to perform well.

Keywords: Recent and ongoing structural change, forecast combination, robust forecasts

JEL Classification: C100, C590

Suggested Citation

Giraitis, Liudas and Kapetanios, George and Price, Simon G., Adaptive Forecasting in the Presence of Recent and Ongoing Structural Change (March 28, 2014). Bank of England Working Paper No. 490, Available at SSRN: https://ssrn.com/abstract=2420400 or http://dx.doi.org/10.2139/ssrn.2420400

Liudas Giraitis

Queen Mary ( email )

Mile End Road
London, London E1 4NS
United Kingdom

HOME PAGE: http://www.econ.qmul.ac.uk/people/liudas-giraitis

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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