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Gains from Switching Between Forecasts

In: Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling

Author

Listed:
  • Allan Timmermann
  • Yinchu Zhu

Abstract

It is rare for the forecasts of one economic forecasting model to always be more accurate than the forecasts from an alternative model. This suggests the possibility of implementing a switching strategy that chooses, at each point in time, the forecasting model that is expected to be most accurate conditional on a set of instruments that are used to track the relative accuracy of the underlying forecasts. The authors analyze the factors determining the expected gains from such a switching rule over a strategy of always using one of the underlying forecasts. The authors derive bounds on the expected gains from switching for both the nested and non-nested cases and also analyze the case with a highly persistent (near-unit root) predictor variable.

Suggested Citation

  • Allan Timmermann & Yinchu Zhu, 2022. "Gains from Switching Between Forecasts," Advances in Econometrics, in: Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling, volume 43, pages 99-116, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-90532021000043a006
    DOI: 10.1108/S0731-90532021000043A006
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