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Long-run forecasting in multicointegrated systems

✍ Scribed by Boriss Siliverstovs; Tom Engsted; Niels Haldrup

Publisher
John Wiley and Sons
Year
2004
Tongue
English
Weight
162 KB
Volume
23
Category
Article
ISSN
0277-6693

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✦ Synopsis

Abstract

We extend the analysis of Christoffersen and Diebold (1998) on long‐run forecasting in cointegrated systems to __multi__cointegrated systems. For the forecast evaluation we consider several loss functions, each of which has a particular interpretation in the context of stock‐flow models where multicointegration typically occurs. A loss function based on a standard mean square forecast error (MSFE) criterion focuses on the forecast errors of the flow variables alone. Likewise, a loss function based on the triangular representation of cointegrated systems (suggested by Christoffersen and Diebold) considers forecast errors associated with changes in both stock (modelled through the cointegrating restrictions) and flow variables. We suggest a new loss function based on the triangular representation of multicointegrated systems which further penalizes deviations from the long‐run relationship between the levels of stock and flow variables as well as changes in the flow variables. Among other things, we show that if one is concerned with all possible long‐run relations between stock and flow variables, this new loss function entails high and increasing forecasting gains compared to both the standard MSFE criterion and Christoffersen and Diebold's criterion. This paper demonstrates the importance of carefully selecting loss functions in forecast evaluation of models involving stock and flow variables. Copyright © 2004 John Wiley & Sons, Ltd.

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