- 1 August 2011
- WORKING PAPER SERIES - No. 1365Details
- The issue of forecast aggregation is to determine whether it is better to forecast a series directly or instead construct forecasts of its components and then sum these component forecasts. Notwithstanding some underlying theoretical results, it is generally accepted that forecast aggregation is an empirical issue. Empirical results in the literature often go unexplained. This leaves forecasters in the dark when confronted with the option of forecast aggregation. We take our empirical exercise a step further by considering the underlying issues in more detail. We analyse two price datasets, one for the United States and one for the Euro Area, which have distinctive dynamics and provide a guide to model choice. We also consider multiple levels of aggregation for each dataset. The models include an autoregressive model, a factor augmented autoregressive model, a large Bayesian VAR and a time-varying model with stochastic volatility. We find that once the appropriate model has been found, forecast aggregation can significantly improve forecast performance. These results are robust to the choice of data transformation.
- JEL Code
- E17 : Macroeconomics and Monetary Economics→General Aggregative Models→Forecasting and Simulation: Models and Applications
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General
C38 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Classification Methods, Cluster Analysis, Principal Components, Factor Models