Forecasting with equilibrium-correction models during structural breaks
When location shifts occur, cointegration-based equilibrium-correction models (EqCMs) face forecasting problems. We consider alleviating such forecast failure by updating, intercept corrections, differencing, and estimating the future progress of an 'internal' break. Updating leads to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, but helps when collinearities are changed by an 'external' break with the EqCM staying constant. Both mechanistic corrections help compared to retaining a pre-break estimated model, but an estimated model of the break process could outperform. We apply the approaches to EqCMs for UK M1, compared with updating a learning function as the break evolves.
Year of publication: |
2010
|
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Authors: | Castle, Jennifer L. ; Fawcett, Nicholas W.P. ; Hendry, David F. |
Published in: |
Journal of Econometrics. - Elsevier, ISSN 0304-4076. - Vol. 158.2010, 1, p. 25-36
|
Publisher: |
Elsevier |
Keywords: | Cointegration Equilibrium-correction Forecasting Location shifts Collinearity M1 |
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