Forecasting with equilibrium-correction models during structural breaks

A-Tier
Journal: Journal of Econometrics
Year: 2010
Volume: 158
Issue: 1
Pages: 25-36

Score contribution per author:

1.341 = (α=2.01 / 3 authors) × 2.0x A-tier

α: calibrated so average coauthorship-adjusted count equals average raw count

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 to retaining a pre-break estimated model, but an estimated model of the break process could outperform. We apply the approaches to EqCMs for UK M1, compared with updating a learning function as the break evolves.

Technical Details

RePEc Handle
repec:eee:econom:v:158:y:2010:i:1:p:25-36
Journal Field
Econometrics
Author Count
3
Added to Database
2026-01-25