Optimal Forecast Combination Under Regime Switching

31 Pages Posted: 2 Dec 2004

See all articles by Graham Elliott

Graham Elliott

University of California, San Diego (UCSD) - Department of Economics

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2004

Abstract

This Paper proposes a new forecast combination method that lets the combination weights be driven by regime switching in a latent state variable. An empirical application that combines forecasts from survey data and time series models finds that the proposed regime switching combination scheme performs well for a variety of macroeconomic variables. Monte Carlo simulations shed light on the type of data generating processes for which the proposed combination method can be expected to perform better than a range of alternative combination schemes. Finally, we show how time-variations in the combination weights arise when the target variable and the predictors share a common factor structure driven by a hidden Markov process.

Keywords: Forecast combination, time-varying combination weights, Markov switching, survey data

JEL Classification: C53

Suggested Citation

Elliott, Graham and Timmermann, Allan, Optimal Forecast Combination Under Regime Switching (October 2004). Available at SSRN: https://ssrn.com/abstract=628772

Graham Elliott

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4481 (Phone)
858-534-7040 (Fax)

Allan Timmermann (Contact Author)

UCSD ( email )

9500 Gilman Drive
La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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