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The use of encompassing tests for forecast combinations

✍ Scribed by Turgut Kışınbay

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
140 KB
Volume
29
Category
Article
ISSN
0277-6693

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✦ Synopsis

Abstract

This paper proposes an algorithm that uses forecast encompassing tests for combining forecasts when there are a large number of forecasts that might enter the combination. The algorithm excludes a forecast from the combination if it is encompassed by another forecast. To assess the usefulness of this approach, an extensive empirical analysis is undertaken using a US macroeconomic dataset. The results are encouraging; the algorithm forecasts outperform benchmark model forecasts, in a mean square error (MSE) sense, in a majority of cases. The paper also compares the empirical performance of different approaches to forecast combination, and provides a rule‐of‐thumb cut‐off point for the thick‐modeling approach. Copyright © 2009 John Wiley & Sons, Ltd.

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