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Path forecast evaluation

Author

Listed:
  • Òscar Jordà

    (Department of Economics, University of California, Davis, CA, USA)

  • Massimiliano Marcellino

    (Department of Economics, European University Institute, Florence, Italy and Bocconi University)

Abstract

A path forecast refers to the sequence of forecasts 1 to H periods into the future. A summary of the range of possible paths the predicted variable may follow for a given confidence level requires construction of simultaneous confidence regions that adjust for any covariance between the elements of the path forecast. This paper shows how to construct such regions with the joint predictive density and Scheffé's S-method of 1953. In addition, the joint predictive density can be used to construct simple statistics to evaluate the local internal consistency of a forecasting exercise of a system of variables. Monte Carlo simulations demonstrate that these simultaneous confidence regions provide approximately correct coverage in situations where traditional error bands, based on the collection of marginal predictive densities for each horizon, are vastly off the mark. The paper showcases these methods with an application to the most recent monetary episode of interest rate hikes in the US macroeconomy. Copyright © 2010 John Wiley & Sons, Ltd.

Suggested Citation

  • Òscar Jordà & Massimiliano Marcellino, 2010. "Path forecast evaluation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 635-662.
    • Handle: RePEc:jae:japmet:v:25:y:2010:i:4:p:635-662
    DOI: 10.1002/jae.1166
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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