How Costly is it to Ignore Breaks when Forecasting the Direction of a Time Series?
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Authors
Pesaran, M. Hashem
Timmermann, Allan
Publication Date
2004-06-16Series
Cambridge Working Papers in Economics
Publisher
Faculty of Economics
Language
en_GB
Type
Working Paper
Metadata
Show full item recordCitation
Pesaran, M. H., & Timmermann, A. (2004). How Costly is it to Ignore Breaks when Forecasting the Direction of a Time Series?. https://doi.org/10.17863/CAM.5390
Abstract
Empirical evidence suggests that many macroeconomic and financial time-series are subject to occasional structural breaks. In this paper we present analytical results quantifying the effects of such breaks on the correlation between the forecast and the realisation, and on the ability to forecast the sign or direction of a time-series that is subject to breaks. Our results suggest that it can be very costly to ignore breaks. Forecasting approaches that condition on the most recent break are likely to perform better over unconditional approaches that use expanding or rolling estimation windows, provided that the break is reasonably large.
Keywords
Classification-JEL: C22, G10, sign prediction, estimation window, structural breaks
Identifiers
This record's DOI: https://doi.org/10.17863/CAM.5390
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