English, Article, Journal or magazine article edition: Forecasting with Equilibrium-correction Models during Structural Breaks Jennifer L. Castle; Nicholas W.P. Fawcett; David F. Hendry

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Bookmark: http://trove.nla.gov.au/version/20781
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Forecasting with Equilibrium-correction Models during Structural Breaks
Author
  • Jennifer L. Castle
  • Nicholas W.P. Fawcett
  • David F. Hendry
Physical Description
  • preprint
Notes
  • When breaks occur, equilibrium-correction models (EqCMs) based on cointegration face forecasting problems. We investigate approaches to alleviate forecast failure following a location shift, including updating, intercept corrections, differencing, and estimating the future impact of an ‘internal’ break during its progress. Although updating can lead to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, we show that updating can help when collinearities are changed by an ‘external’ break and the EqCM itself remains constant. Both mechanistic corrections help compared to just retaining a pre-break estimated model, but an estimated model of the break process could outperform. Throughout, we apply the approaches to the much-studied example of EqCMs for UK M1, and compare with updating a learning function as the break evolves.
  • Forecasting, Location Shifts, Equilibrium-Correction Models
  • RePEc:oxf:wpaper:408
Language
  • English
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