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Forecasting with equilibrium-correction models during structural breaks

Abstract:

When breaks occur, equilibrium-correction models (EqCMs) based on cointegration face forecasting problems. We investigate approaches to alleviate forecast failure following a location shift, including updating, intercept corrections, differencing, and estimating the future impact of an 'internal' break during its progress. Although updating can lead to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, we show that updating can help when collinearities are changed by an...

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Publication status:
Published

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Publisher:
University of Oxford
Series:
Department of Economics Discussion Paper Series
Publication date:
2008-10-01
Paper number:
408
Keywords:
Pubs id:
1144023
Local pid:
pubs:1144023
Deposit date:
2020-12-15

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