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Forecasting in the presence of recent structural change

Eklund, J., Kapetanios, G. and Price, S. (2011). Forecasting in the presence of recent structural change (Report No. 11/05). London, UK: Department of Economics, City University London.

Abstract

We examine how to forecast after a recent break. We consider monitoring for change and then combining forecasts from models that do and do not use data before the change; and robust methods, namely rolling regressions, forecast averaging over different windows and exponentially weighted moving average (EWMA) forecasting. We derive analytical results for the performance of the robust methods relative to a full-sample recursive benchmark. For a location model subject to stochastic breaks the relative MSFE ranking is EWMA < rolling regression < forecast averaging. No clear ranking emerges under deterministic breaks. In Monte Carlo experiments forecast averaging improves performance in many cases with little penalty where there are small or infrequent changes. Similar results emerge when we examine a large number of UK and US macroeconomic series.

Publication Type: Monograph (Discussion Paper)
Additional Information: © 2011 the authors.
Publisher Keywords: monitoring, recent structural change, forecast combination, robust forecasts
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics > Discussion Paper Series
URI: http://openaccess.city.ac.uk/id/eprint/1457
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