Forecasting with Difference-Stationary and Trend-Stationary Models.

Working paper

Although difference-stationary (DS) and trend-stationary (TS) processes have been subject to considerable analysis, there are no direct comparisons for each being the data-generation process (DGP). We examine incorrect choice between these models for forecasting for both known and estimated parameters. Three sets of Monte Carlo simulations illustrate the analysis, to evaluate the biases in conventional standard errors when each model is misspecified, compute the relative mean-square forecast errors of the two models for both DGPs, and investigate autocorrelated errors, so both models can better approximate the converse DGP. The outcomes are surprisingly different from established results.

Authors: Clements, M; Hendry, D

• Publisher: Department of Economics (University of Warwick)
• Series: The Warwick Economics Research Paper Series (TWERPS)
• Publication date: 1998-01-01
• Language: English