Series: Working Papers. 1751.
Author: Gergely Akos Ganics.
Topics: Quantitative methods | Crisis | International Economy | Economic growth and convergence | Regional analysis.
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Abstract
How should researchers combine predictive densities to improve their forecasts? I propose consistent estimators of weights which deliver density forecast combinations approximating the true predictive density, conditional on the researcher’s information set. Monte Carlo simulations confirm that the proposed methods work well for sample sizes of practical interest. In an empirical example of forecasting monthly US industrial production, I demonstrate that the estimator delivers density forecasts which are superior to well-known benchmarks, such as the equal weights scheme. Specifically, I show that housing permits had valuable predictive power before and after the Great Recession. Furthermore, stock returns and corporate bond spreads proved to be useful predictors during the recent crisis, suggesting that financial variables help with density forecasting in a highly leveraged economy.