Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/72302
Authors: 
Anyfantakis, Costas
Caporale, Guglielmo M.
Pittis, Nikitas
Year of Publication: 
2004
Series/Report no.: 
Reihe Ökonomie / Economics Series, Institut für Höhere Studien (IHS) 160
Abstract: 
This paper uses Monte Carlo techniques to assess the loss in terms of forecast accuracy which is incurred when the true DGP exhibits parameter instability which is either overlooked or incorrectly modelled. We find that the loss is considerable when a FCM is estimated instead of the true TVCM, this loss being an increasing function of the degree of persistence and of the variance of the process driving the slope coefficient. A loss is also incurred when a TVCM different from the correct one is specified, the resulting forecasts being even less accurate than those of a FCM. However, the loss can be minimised by selecting a TVCM which, although incorrect, nests the true one, more specifically an AR(1) model with a constant. Finally, there is hardly any loss resulting from using a TVCM when the underlying DGP is characterised by fixed coefficients.
Subjects: 
fixed coefficient models
time varying parameter models
forecasting
JEL: 
G14
G15
C22
Document Type: 
Working Paper

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