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A simple explanation of the forecast combination puzzle
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Smith, Jeremy 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. doi:10.1111/j.1468-0084.2008.00541.x ISSN 0305-9049.
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Official URL: http://dx.doi.org/10.1111/j.1468-0084.2008.00541.x
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 | ||||
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Subjects: | H Social Sciences > HC Economic History and Conditions H Social Sciences Q Science > QA Mathematics |
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Divisions: | Faculty of Social Sciences > Economics | ||||
Journal or Publication Title: | Oxford Bulletin of Economics and Statistics | ||||
Publisher: | Wiley-Blackwell Publishing, Inc | ||||
ISSN: | 0305-9049 | ||||
Official Date: | June 2009 | ||||
Dates: |
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Volume: | Vol.71 | ||||
Number: | No.3 | ||||
Number of Pages: | 25 | ||||
Page Range: | pp. 331-355 | ||||
DOI: | 10.1111/j.1468-0084.2008.00541.x | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
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