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Forecasting an aggregate of cointegrated disaggregates

✍ Scribed by Todd E. Clark

Publisher
John Wiley and Sons
Year
2000
Tongue
English
Weight
189 KB
Volume
19
Category
Article
ISSN
0277-6693

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✦ Synopsis

This study examines the problem of forecasting an aggregate of cointegrated disaggregates. It ®rst establishes conditions under which forecasts of an aggregate variable obtained from a disaggregate VECM will be equal to those from an aggregate, univariate time series model, and develops a simple procedure for testing those conditions. The paper then uses Monte Carlo simulations to show, for a ®nite sample, that the proposed test has good size and power properties and that whether a model satis®es the aggregation conditions is closely related to out-of-sample forecast performance. The paper then shows that ignoring cointegration and specifying the disaggregate model as a VAR in dierences can signi®cantly aect analyses of aggregation, with the VAR-based test for aggregation possibly leading to faulty inference and the dierenced VAR forecasts potentially understating the bene®ts of disaggregate information. Finally, analysis of an empirical problem con®rms the basic results.

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