Optimal Forecast Combination Under Regime Switching

22 Pages Posted: 6 Nov 2005

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)

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Abstract

This article 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.

Suggested Citation

Elliott, Graham and Timmermann, Allan, Optimal Forecast Combination Under Regime Switching. International Economic Review, Vol. 46, No. 4, pp. 1081-1102, November 2005, Available at SSRN: https://ssrn.com/abstract=825173

Graham Elliott (Contact Author)

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

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

Allan Timmermann

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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