Forecast Combination in the Frequency Domain

42 Pages Posted: 6 Feb 2023

See all articles by Gonçalo Faria

Gonçalo Faria

Catholic University of Portugal (UCP) - Católica Porto Business School; University of Vigo

Fabio Verona

Bank of Finland - Research

Date Written: February 6, 2023

Abstract

Predictability is time and frequency dependent. We propose a new forecasting method – forecast combination in the frequency domain – that takes this fact into account. With this method we forecast the equity premium and real GDP growth rate. Combining forecasts in the frequency domain produces markedly more accurate predictions relative to the standard forecast combination in the time domain, both in terms of statistical and economic measures of out-of-sample predictability. In a real-time forecasting exercise, the flexibility of this method allows to capture remarkably well the sudden and abrupt drops associated with recessions and further improve predictability.

Keywords: forecast combination, frequency domain, equity premium, GDP growth, Haar filter, wavelets

JEL Classification: C58, G11, G17

Suggested Citation

Faria, Gonçalo and Verona, Fabio, Forecast Combination in the Frequency Domain (February 6, 2023). Bank of Finland Research Discussion Paper No. 1/2023, Available at SSRN: https://ssrn.com/abstract=4349867 or http://dx.doi.org/10.2139/ssrn.4349867

Gonçalo Faria (Contact Author)

Catholic University of Portugal (UCP) - Católica Porto Business School ( email )

Rua de Diogo Botelho 1327
Porto, Porto 4169-005
Portugal

University of Vigo

E.U. de Enx. Técn. Industrial.
Vigo, Pontevedra E-36200
Spain

Fabio Verona

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://fabioverona.rvsteam.net/

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