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    Some Theoretical Results on Forecast Combinations

    Access Status
    Fulltext not available
    Authors
    Chan, Felix
    Pauwels, L.
    Date
    2018
    Type
    Journal Article
    
    Metadata
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    Citation
    Chan, F. and Pauwels, L. 2018. Some Theoretical Results on Forecast Combinations. International Journal of Forecasting. 34 (1): pp. 64-74.
    Source Title
    International Journal of Forecasting
    DOI
    10.1016/J.IJFORECAST.2017.08.005
    ISSN
    0169-2070
    School
    School of Economics and Finance
    URI
    http://hdl.handle.net/20.500.11937/72424
    Collection
    • Curtin Research Publications
    Abstract

    This paper proposes a framework for the analysis of the theoretical properties of forecast combination, with the forecast performance being measured in terms of mean squared forecast errors (MSFE). Such a framework is useful for deriving all existing results with ease. In addition, it also provides insights into two forecast combination puzzles. Specifically, it investigates why a simple average of forecasts often outperforms forecasts from single models in terms of MSFEs, and why a more complicated weighting scheme does not always perform better than a simple average. In addition, this paper presents two new findings that are particularly relevant in practice. First, the MSFE of a forecast combination decreases as the number of models increases. Second, the conventional approach to the selection of optimal models, based on a simple comparison of MSFEs without further statistical testing, leads to a biased selection.

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