Density Forecast Combinations: The Real-Time Dimension

119 Pages Posted: 25 Feb 2020

See all articles by Peter McAdam

Peter McAdam

European Central Bank (ECB)

Anders Warne

European Central Bank (ECB)

Date Written: February, 2020

Abstract

Density forecast combinations are examined in real-time using the log score to compare five methods: fixed weights, static and dynamic prediction pools, as well as Bayesian and dynamic model averaging. Since real-time data involves one vintage per time period and are subject to revisions, the chosen actuals for such comparisons typically differ from the information that can be used to compute model weights. The terms observation lag and information lag are introduced to clarify the different time shifts involved for these computations and we discuss how they influence the combination methods. We also introduce upper and lower bounds for the density forecasts, allowing us to benchmark the combination methods. The empirical study employs three DSGE models and two BVARs, where the former are variants of the Smets and Wouters model and the latter are benchmarks. The models are estimated on real-time euro area data and the forecasts cover 2001–2014, focusing on inflation and output growth. We find that some combinations are superior to the individual models for the joint and the output forecasts, mainly due to over-confident forecasts of the BVARs during the Great Recession. Combinations with limited weight variation over time and with positive weights on all models provide better forecasts than those with greater weight variation. For the inflation forecasts, the DSGE models are better overall than the BVARs and the combination methods.

Keywords: Bayesian inference, euro area, forecast comparisons, model averaging, prediction pools, predictive likelihood

JEL Classification: C11, C32, C52, C53, E37

Suggested Citation

McAdam, Peter and Warne, Anders, Density Forecast Combinations: The Real-Time Dimension (February, 2020). Available at SSRN: https://ssrn.com/abstract=3544060 or http://dx.doi.org/10.2139/ssrn.3544060

Peter McAdam (Contact Author)

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Eurotower
D-60311 Frankfurt am Main
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Anders Warne

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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