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The mechanics of VAR forecast pooling—A DSGE model based Monte Carlo study

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  • Henzel, Steffen R.
  • Mayr, Johannes
Abstract
This paper analyzes the mechanics of VAR forecast pooling and quantifies the forecast performance under varying conditions. To fill the gap between empirical and purely theoretical research we run a Monte Carlo study and simulate the data from different New Keynesian DSGE models. We find that equally pooling VAR forecasts outperforms single predictions in general and that the gains are substantial for sample sizes relevant in practice. In contrast, the estimation of theoretically optimal weights or model selection is advisable only for very large data sets hardly available in practice. Notably, equally pooling forecasts from small-scale VARs can even dominate forecasts from large VARs including all relevant variables. Given our results, we advocate the use of equally pooled predictions from parsimonious VARs as an easy to implement and competitive forecast approach.

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  • Henzel, Steffen R. & Mayr, Johannes, 2013. "The mechanics of VAR forecast pooling—A DSGE model based Monte Carlo study," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 1-24.
    • Handle: RePEc:eee:ecofin:v:24:y:2013:i:c:p:1-24
    DOI: 10.1016/j.najef.2012.03.009
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    Cited by:

    1. Berg, Tim O. & Henzel, Steffen R., 2015. "Point and density forecasts for the euro area using Bayesian VARs," International Journal of Forecasting, Elsevier, vol. 31(4), pages 1067-1095.
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    3. Christian Grimme & Steffen Henzel & Elisabeth Wieland, 2014. "Inflation uncertainty revisited: a proposal for robust measurement," Empirical Economics, Springer, vol. 47(4), pages 1497-1523, December.
    4. Gupta, Rangan & Hammoudeh, Shawkat & Kim, Won Joong & Simo-Kengne, Beatrice D., 2014. "Forecasting China's foreign exchange reserves using dynamic model averaging: The roles of macroeconomic fundamentals, financial stress and economic uncertainty," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 170-189.

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    More about this item

    Keywords

    Pooling of forecasts; Model uncertainty; VAR model; Monte Carlo study;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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