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Forecasting with equilibrium-correction models during structural breaks

Abstract:

When location shifts occur, cointegration-based equilibrium-correction models (EqCMs) face forecasting problems. We consider alleviating such forecast failure by updating, intercept corrections, differencing, and estimating the future progress of an 'internal' break. Updating leads to a loss of cointegration when an EqCM suffers an equilibrium-mean shift, but helps when collinearities are changed by an 'external' break with the EqCM staying constant. Both mechanistic corrections help compared...

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Publication status:
Published
Peer review status:
Peer reviewed
Version:
Accepted manuscript

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Publisher copy:
10.1016/j.jeconom.2010.03.004

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Department:
Oxford, SSD, Economics
Fawcett, NWP More by this author
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Department:
Oxford, SSD, Economics, EMOD
Publisher:
Elsevier Publisher's website
Journal:
Journal of Econometrics Journal website
Volume:
158
Issue:
1
Pages:
25-36
Publication date:
2010-03-11
DOI:
ISSN:
0304-4076
Pubs id:
pubs:300139
URN:
uri:f9656b10-65ea-4d23-9f58-6c48319da49e
UUID:
uuid:f9656b10-65ea-4d23-9f58-6c48319da49e
Local pid:
pubs:300139

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