Optimal Forecast under Structural Breaks

Tae Hwy Lee, Shahnaz Parsaeian and Aman Ullah

No 202208, Working Papers from University of California at Riverside, Department of Economics

Abstract: This paper develops an optimal combined estimator to forecast out-of-sample under structural breaks. When it comes to forecasting, using only the post-break observations after the most recent break point may not be optimal. In this paper we propose a new estimation method that exploits the pre-break information. In particular, we show how to combine the estimator using the full-sample (i.e., both the pre-break and post-break data) and the estimator using only the post-break sample. The full-sample estimator is inconsistent when there is a break while it is efficient. The post-break estimator is consistent but inefficient. Hence, depending on the severity of the breaks, the full-sample estimator and the post-break estimator can be combined to balance the consistency and efficiency. We derive the Stein-like combined estimator of the full-sample and the post-break estimators, to balance the bias-variance trade-off. The combination weight depends on the break severity, which we measure by the Wu-Hausman statistic. We examine the properties of the proposed method, analytically in theory, numerically in simulation, and also empirically in forecasting real output growth across nine industrial economies.

Keywords: Forecasting; Structural breaks; Stein-like combined estimator; Output growth (search for similar items in EconPapers)
JEL-codes: C13 C32 C53 (search for similar items in EconPapers)
Pages: 35 Pages
Date: 2022-02
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Forthcoming in Journal of Applied Econometrics

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https://economics.ucr.edu/repec/ucr/wpaper/202208.pdf First version, 2022 (application/pdf)

Related works:
Journal Article: Optimal forecast under structural breaks (2022)
Working Paper: Optimal Forecast under Structural Breaks (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:202208

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