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"Estimating the Expected Predictive Accuracy of Econometric Models," International Economic Review, June 1980, 355-378.
pdf file (1,417KB).

Abstract

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Comments

This paper presents a method for estimating the uncertainty of a forecast from an econometric model. The method accounts for the four main sources of uncertainty: uncertainty due to 1) the error terms, 2) the coefficient estimates, 3) the exogenous-variable forecasts, and 4) the possible misspecification of the model. It also accounts for the fact that variances of forecast errors are not constant across time. Because the method accounts for all four sources of uncertainty, it can be used to make accuracy comparisons across model.

I have used this method in much of my work. The method is used in 1979#3 to compare four models. It is used in 1982#3 to estimate misspecificaton effects in the US model. It is used in 1991#2 and 1986#2 to compare the Michigan model and the US model.

The method is also discussed in Chapter 8, Section 8.4, in 1984#2, in 1986#1, and in Chapter 7, Section 7.7, in 1994#2.

The method requires successive reestimation and stochastic simulation of the model being examined, and all this is programmed into the Fair-Parke program. See example 15.1 in Chapter 15 of the FP User's Guide, which goes through the necessary commands step by step.