Smith, Jeremy (Jeremy P.) and Wallis, Kenneth Frank. (2009) A simple explanation of the forecast combination puzzle. Oxford Bulletin of Economics and Statistics, Vol.71 (No.3). pp. 331-355. ISSN 0305-9049

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Abstract

This article presents a formal explanation of the forecast combination puzzle, that simple combinations of point forecasts are repeatedly found to outperform sophisticated weighted combinations in empirical applications. The explanation lies in the effect of finite-sample error in estimating the combining weights. A small Monte Carlo study and a reappraisal of an empirical study by Stock and Watson [Federal Reserve Bank of Richmond Economic Quarterly (2003) Vol. 89/3, pp. 71-90] support this explanation. The Monte Carlo evidence, together with a large-sample approximation to the variance of the combining weight, also supports the popular recommendation to ignore forecast error covariances in estimating the weight.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Economics
Journal or Publication Title:	Oxford Bulletin of Economics and Statistics
Publisher:	Wiley-Blackwell Publishing, Inc
ISSN:	0305-9049
Date:	June 2009
Volume:	Vol.71
Number:	No.3
Number of Pages:	25
Page Range:	pp. 331-355
Identification Number:	10.1111/j.1468-0084.2008.00541.x
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/28157

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