Pooling of Forecasts

31 Pages Posted: 21 Jul 2004  

David F. Hendry

University of Oxford - Department of Economics

Michael P. Clements

University of Reading - Henley Business School

Abstract

We consider forecasting using a combination, when no model coincides with a non-constant data generation process (DGP). Practical experience suggests that combining forecasts adds value, and can even dominate the best individual device. We show why this can occur when forecasting models are differentially mis-specified, and is likely to occur when the DGP is subject to location shifts. Moreover, averaging may then dominate over estimated weights in the combination. Finally, it cannot be proved that only non-encompassed devices should be retained in the combination. Empirical and Monte Carlo illustrations confirm the analysis.

Keywords: Forecast combination, structural breaks, density forecasts

Suggested Citation

Hendry, David F. and Clements, Michael P., Pooling of Forecasts. Econometrics Journal, Vol. 7, No. 1, pp. 1-31, June 2004. Available at SSRN: https://ssrn.com/abstract=565073

David F. Hendry (Contact Author)

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 278544 (Phone)
+44 1865 278557 (Fax)

Michael P. Clements

University of Reading - Henley Business School ( email )

Whiteknights
Reading, RG6 6BA
United Kingdom

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