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

30 Pages Posted: 12 Jul 2014

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)

Federal Housing Finance Agency ( email )

400 7th Street SW
Washington, DC 20552
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
26
Abstract Views
461
PlumX Metrics