The Implications for Econometric Modelling of Forecast Failure |
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Authors: | David F Hendry & Jurgen A Doornik |
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Institution: | Nuffield College, Oxford |
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Abstract: | To reconcile forecast failure with building congruent empirical models, we analyze the sources of mis-prediction. This reveals that ex ante forecast failure is purely a function of forecast-period events, not determinable from in-sample information. The primary causes are unmodelled shifts in deterministic factors, rather than model mis-specification, collinearity, or a lack of parsimony. We examine the effects of deterministic breaks on equilibrium-correction mechanisms, and consider the role of causal variables. Throughout, Monte Carlo simulation and empirical models illustrate the analysis, and support a progressive research strategy based on learning from past failures. |
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