Modelling Methodology and Forecast Failure.

Journal article

We analyse by simulation the impact of model-selection strategies (sometimes called pre-testing) on forecast performance in both constant- and non-constant-parameter processes. Restricted, unrestricted and selected models are compared when either of the first two might generate the data. We find little evidence that strategies such as general-to-specific induce significant over-fitting, or thereby cause forecast-failure rejection rates to greatly exceed nominal sizes. Parameter non-constancies put a premium on correct specification, but in general, model-selection effects appear to be relatively small, and progressive research is able to detect the mis-specifications.

Authors: Clements, M; Hendry, D

• Journal: Econometrics Journal
• Volume: 5
• Publication date: 2002-01-01
• ISSN: 1368-4221
• Language: English