We would like to thank the participants of the May 1985 meeting of the Institute for Applied Systems Analysis (Working Group on Statistical Analysis of Economic Structural Change), and the September 1985 meeting of Project LINK, for valuable comments. All errors are our own. Parts of this work draw on a companion paper, Diebold and Pauly (1986).
Structural change and the combination of forecasts
Article first published online: 21 SEP 2006
Copyright © 1987 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 6, Issue 1, pages 21–40, 1987
How to Cite
Diebold, F. X. and Pauly, P. (1987), Structural change and the combination of forecasts. J. Forecast., 6: 21–40. doi: 10.1002/for.3980060103
- Issue published online: 21 SEP 2006
- Article first published online: 21 SEP 2006
- Manuscript Revised: DEC 1986
- Manuscript Received: APR 1986
- Structural change;
- Forecast combination;
- Varying-parameter models
Forecasters are generally concerned about the properties of model-based predictions in the presence of structural change. In this paper, it is argued that forecast errors can under those conditions be greatly reduced through systematic combination of forecasts. We propose various extensions of the standard regression-based theory of forecast combination. Rolling weighted least squares and time-varying parameter techniques are shown to be useful generalizations of the basic framework. Numerical examples, based on various types of structural change in the constituent forecasts, indicate that the potential reduction in forecast error variance through these methods is very significant. The adaptive nature of these updating procedures greatly enhances the effect of risk-spreading embodied in standard combination techniques.