Forecasting an Aggregate in the Presence of Structural Breaks in the Disaggregates

30 Pages Posted: 12 Jul 2014

See all articles by William D. Larson

William D. Larson

Department of the Treasury, Office of Financial Research

Date Written: July 10, 2014

Abstract

There is a debate in the literature on the best method to forecast an aggregate: (1) forecast the aggregate directly, (2) forecast the disaggregates and then aggregate, or (3) forecast the aggregate using disaggregate information. This paper contributes to this debate by suggesting that in the presence of moderate-sized structural breaks in the disaggregates, approach (2) is preferred because of the low power to detect mean shifts in the disaggregates using models of aggregates. In support of this approach are two exercises. First, a simple Monte Carlo study demonstrates theoretical forecasting improvements. Second, empirical evidence is given using pseudo-ex ante forecasts of aggregate proven oil reserves in the United States.

Keywords: model selection, intercept correction, forecast robustification

JEL Classification: C52, C53, Q3

Suggested Citation

Larson, William D., Forecasting an Aggregate in the Presence of Structural Breaks in the Disaggregates (July 10, 2014). Available at SSRN: https://ssrn.com/abstract=2464700 or http://dx.doi.org/10.2139/ssrn.2464700

William D. Larson (Contact Author)

Department of the Treasury, Office of Financial Research ( email )

112 15th St NE
Washington, DC 20002
United States

HOME PAGE: http://www.williamlarson.com

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