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Forecast Combination and Model Averaging Using Predictive Measures

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Author Info
Jana Eklund
Sune Karlsson

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Abstract

We extend the standard approach to Bayesian forecast combination by forming the weights for the model averaged forecast from the predictive likelihood rather than the standard marginal likelihood. The use of predictive measures of fit offers greater protection against in-sample overfitting when uninformative priors on the model parameters are used and improves forecast performance. For the predictive likelihood we argue that the forecast weights have good large and small sample properties. This is confirmed in a simulation study and in an application to forecasts of the Swedish inflation rate, where forecast combination using the predictive likelihood outperforms standard Bayesian model averaging using the marginal likelihood.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Econometric Reviews.

Volume (Year): 26 (2007)
Issue (Month): 2-4 ()
Pages: 329-363
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Handle: RePEc:taf:emetrv:v:26:y:2007:i:2-4:p:329-363

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Related research
Keywords: Bayesian model averaging; Inflation rate; Partial Bayes factor; Predictive likelihood; Training sample; Uninformative priors;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476. [Downloadable!] (restricted)
  2. Gary Koop & Simon Potter, 2004. "Forecasting in dynamic factor models using Bayesian model averaging," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 550-565, December. [Downloadable!] (restricted)
  3. Fernandez, Carmen & Ley, Eduardo & Steel, Mark F. J., 2001. "Benchmark priors for Bayesian model averaging," Journal of Econometrics, Elsevier, vol. 100(2), pages 381-427, February. [Downloadable!] (restricted)
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  4. Elliott, Graham & Timmermann, Allan, 2004. "Optimal forecast combinations under general loss functions and forecast error distributions," Journal of Econometrics, Elsevier, vol. 122(1), pages 47-79, September. [Downloadable!] (restricted)
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  5. David F. Hendry & Michael P. Clements, 2004. "Pooling of forecasts," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 1-31, 06. [Downloadable!] (restricted)
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  6. Makridakis, Spyros & Chatfield, Chris & Hibon, Michele & Lawrence, Michael & Mills, Terence & Ord, Keith & Simmons, LeRoy F., 1993. "The M2-competition: A real-time judgmentally based forecasting study," International Journal of Forecasting, Elsevier, vol. 9(1), pages 5-22, April. [Downloadable!] (restricted)
  7. Chevillon, Guillaume & Hendry, David F., 2005. "Non-parametric direct multi-step estimation for forecasting economic processes," International Journal of Forecasting, Elsevier, vol. 21(2), pages 201-218. [Downloadable!] (restricted)
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  8. Min, Chung-ki & Zellner, Arnold, 1993. "Bayesian and non-Bayesian methods for combining models and forecasts with applications to forecasting international growth rates," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 89-118, March. [Downloadable!] (restricted)
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  9. Sune Karlsson & Tor Jacobson, 2004. "Finding good predictors for inflation: a Bayesian model averaging approach," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(7), pages 479-496. [Downloadable!]
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  10. Fernandez-Villaverde, Jesus & Francisco Rubio-Ramirez, Juan, 2004. "Comparing dynamic equilibrium models to data: a Bayesian approach," Journal of Econometrics, Elsevier, vol. 123(1), pages 153-187, November. [Downloadable!] (restricted)
  11. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andersson, Michael K & Karlsson, Sune, 2007. "Bayesian Forecast Combination for VAR Models," Working Papers 2007:13, Örebro University, Swedish Business School. [Downloadable!]
    Other versions:
  2. De Pooter, Michiel & Ravazzolo, Francesco & van Dijk, Dick, 2006. "Predicting the term structure of interest rates incorporating parameter uncertainty, model uncertainty and macroeconomic information," MPRA Paper 2512, University Library of Munich, Germany, revised 03 Mar 2007. [Downloadable!]
    Other versions:
  3. Todd E. Clark & Michael W. McCracken, 2008. "Averaging forecasts from VARs with uncertain instabilities," Working Papers 2008-030, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  4. David Jamieson Bolder & Yuliya Romanyuk, 2008. "Combining Canadian Interest-Rate Forecasts," Working Papers 08-34, Bank of Canada. [Downloadable!]
  5. Joshua Gallin & Randal Verbrugge, 2007. "Improving the CPI’s Age-Bias Adjustment: Leverage, Disaggregation and Model Averaging," Working Papers 411, U.S. Bureau of Labor Statistics. [Downloadable!]
  6. Chun Liu & John M Maheu, 2008. "Forecasting Realized Volatility: A Bayesian Model Averaging Approach," Working Papers tecipa-313, University of Toronto, Department of Economics. [Downloadable!]
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  7. John M Maheu & Thomas H McCurdy, 2007. "How useful are historical data for forecasting the long-run equity return distribution?," Working Papers tecipa-293, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
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