Template-type: ReDIF-Paper 1.0
Author-Name:David F. Hendry
Author-Email:david.hendry@economics.ox.ac.uk
Author-Workplace-Name:Economcis Department, University of Oxford
Title:Robustifying Forecasts from Equilibrium-Correction Models
Abstract: In a non-stationary world subject to structural breaks,
where model and mechanism differ, equilibrium-correction models 
are a risky device from which to forecast. Equilibrium shifts 
entail systematic forecast failure, and indeed forecasts will 
tend to move in the opposite direction to the data. A new 
explanation for the empirical success of second differencing 
is proposed. We consider model transformations based on 
additional differencing to reduce forecast-error biases, 
as usual at some cost in increased forecast-error variances.
The analysis is illustrated by an empirical application to 
narrow money holdings in the UK.
Length:30 pages
Creation-Date:2004-04-01
Number:2004-W14
File-URL:http://www.nuff.ox.ac.uk/economics/papers/2004/w14/DFHEqCMRobust.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:0414