Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5096892 | Journal of Econometrics | 2010 | 12 Pages |
Abstract
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Statistics and Probability
Authors
Jennifer L. Castle, Nicholas W.P. Fawcett, David F. Hendry,