Forecasting with equilibrium-correction models during structural breaks
When breaks occur, equilibrium-correction models (EqCMs) based on cointegration face forecasting problems. We investigate approaches to alleviate forecast failure following a location shift, including updating, intercept corrections, differencing, and estimating the future impact of an 'intern...
| Glavni autori: | , , |
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| Format: | Working paper |
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University of Oxford
2008
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| _version_ | 1826290445584433152 |
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| author | Castle, J Hendry, D Fawcett, N |
| author_facet | Castle, J Hendry, D Fawcett, N |
| author_sort | Castle, J |
| collection | OXFORD |
| description | When breaks occur, equilibrium-correction models (EqCMs) based on cointegration face forecasting problems. We investigate approaches to alleviate forecast failure following a location shift, including updating, intercept corrections, differencing, and estimating the future impact of an 'internal' break during its progress. Although updating can lead to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, we show that updating can help when collinearities are changed by an 'external' break and the EqCM itself remains constant. Both mechanistic corrections help compared to just retaining a pre-break estimated model, but an estimated model of the break process could outperform. Throughout, we apply the approaches to the much-studied example of EqCMs for UK M1, and compare with updating a learning function as the break evolves. |
| first_indexed | 2024-03-07T02:44:18Z |
| format | Working paper |
| id | oxford-uuid:ab8455d8-9ed5-4561-b19f-b4dac1e1d5ee |
| institution | University of Oxford |
| last_indexed | 2024-03-07T02:44:18Z |
| publishDate | 2008 |
| publisher | University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:ab8455d8-9ed5-4561-b19f-b4dac1e1d5ee2022-03-27T03:22:25ZForecasting with equilibrium-correction models during structural breaksWorking paperhttp://purl.org/coar/resource_type/c_8042uuid:ab8455d8-9ed5-4561-b19f-b4dac1e1d5eeSymplectic ElementsBulk import via SwordUniversity of Oxford2008Castle, JHendry, DFawcett, NWhen breaks occur, equilibrium-correction models (EqCMs) based on cointegration face forecasting problems. We investigate approaches to alleviate forecast failure following a location shift, including updating, intercept corrections, differencing, and estimating the future impact of an 'internal' break during its progress. Although updating can lead to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, we show that updating can help when collinearities are changed by an 'external' break and the EqCM itself remains constant. Both mechanistic corrections help compared to just retaining a pre-break estimated model, but an estimated model of the break process could outperform. Throughout, we apply the approaches to the much-studied example of EqCMs for UK M1, and compare with updating a learning function as the break evolves. |
| spellingShingle | Castle, J Hendry, D Fawcett, N Forecasting with equilibrium-correction models during structural breaks |
| title | Forecasting with equilibrium-correction models during structural breaks |
| title_full | Forecasting with equilibrium-correction models during structural breaks |
| title_fullStr | Forecasting with equilibrium-correction models during structural breaks |
| title_full_unstemmed | Forecasting with equilibrium-correction models during structural breaks |
| title_short | Forecasting with equilibrium-correction models during structural breaks |
| title_sort | forecasting with equilibrium correction models during structural breaks |
| work_keys_str_mv | AT castlej forecastingwithequilibriumcorrectionmodelsduringstructuralbreaks AT hendryd forecastingwithequilibriumcorrectionmodelsduringstructuralbreaks AT fawcettn forecastingwithequilibriumcorrectionmodelsduringstructuralbreaks |