Optimal Multi-Step VAR Forecasting Averaging

54 Pages Posted: 19 Jul 2017

See all articles by Jen-Che Liao

Jen-Che Liao

National Chengchi University - Department of Economics

Wen-Jen Tsay

Academia Sinica - Institute of Economics

Date Written: July 15, 2017

Abstract

This paper proposes frequentist multiple-equation least squares averaging approaches for multi-step forecasting with vector autoregressive (VAR) models. The proposed VAR forecasting averaging methods are based on the multivariate Mallows model averaging (MMMA) and multivariate leave-h-out cross-validation averaging (MCVAh) criteria (with h denoting the forecast horizon), which are valid for iterative and direct multi-step forecasting averaging, respectively. Under the framework of stationary VAR processes of infinite order, we provide theoretical justifications by establishing asymptotic unbiasedness and asymptotic optimality of the proposed forecasting averaging approaches. Specifically, MMMA exhibits asymptotic optimality for one-step ahead forecast averaging, whereas for direct multi-step forecasting averaging the asymptotically optimal combination weights are determined separately for each forecast horizon based on the MCVAh procedure. The finite-sample behaviour of the proposed averaging procedures under misspecification is investigated via simulation experiments. An empirical application to a three-variable monetary VAR, based on the U.S. data, is also provided to present our methodology.

Keywords: Asymptotic optimality, Forecast combination/averaging, Iterative and direct multi-step forecasting, Vector autoregressions

JEL Classification: C13, C32, C53

Suggested Citation

Liao, Jen-Che and Tsay, Wen-Jen, Optimal Multi-Step VAR Forecasting Averaging (July 15, 2017). Available at SSRN: https://ssrn.com/abstract=3003454 or http://dx.doi.org/10.2139/ssrn.3003454

Jen-Che Liao (Contact Author)

National Chengchi University - Department of Economics ( email )

64, Sec. 2, ZhiNan Rd
Wenshan Dist
Taipei City, 11605
Taiwan

Wen-Jen Tsay

Academia Sinica - Institute of Economics ( email )

128 Academia Road, Section 2
Nankang
Taipei, 11529
Taiwan

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