Does the Box-Cox transformation help in forecasting macroeconomic time series?

Helmut Lütkepohl and Tommaso Proietti

No 08/2011, Working Papers from University of Sydney Business School, Discipline of Business Analytics

Abstract: The paper investigates whether transforming a time series leads to an improvement in forecasting accuracy. The class of transformations that is considered is the Box-Cox power transformation, which applies to series measured on a ratio scale. We propose a nonparametric approach for estimating the optimal transformation parameter based on the frequency domain estimation of the prediction error variance, and also conduct an extensive recursive forecast experiment on a large set of seasonal monthly macroeconomic time series related to industrial production and retail turnover. In about one fifth of the series considered the Box-Cox transformation produces forecasts significantly better than the untransformed data at one-step-ahead horizon; in most of the cases the logarithmic transformation is the relevant one. As the forecast horizon increases, the evidence in favour of a transformation becomes less strong. Typically, the naïve predictor that just reverses the transformation leads to a lower mean square error than the optimal predictor at short forecast leads. We also discuss whether the preliminary in-sample frequency domain assessment conducted provides a reliable guidance which series should be transformed for improving significantly the predictive performance.

Keywords: Rolling forecasts; Nonparametric estimation of prediction error variance; Forecasts comparisons; Multi-step forecasting (search for similar items in EconPapers)
Date: 2011-10
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Citations: View citations in EconPapers (5)

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http://hdl.handle.net/2123/8167

Related works:
Journal Article: Does the Box–Cox transformation help in forecasting macroeconomic time series? (2013)
Working Paper: Does the Box-Cox Transformation Help in Forecasting Macroeconomic Time Series? (2011)
Working Paper: Does the Box-Cox transformation help in forecasting macroeconomic time series? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:syb:wpbsba:2123/8167

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