The economic and statistical value of forecast combinations under regime switching: An application to predictable US returns

Massimo Guidolin, Carrie Fangzhou Na

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

We address an interesting case - the predictability of excess US asset returns from macroeconomic factors within a flexible regime-switching VAR framework - in which the presence of regimes may lead to superior forecasting performance from forecast combinations. After documenting that forecast combinations provide gains in predictive accuracy and that these gains are statistically significant, we show that forecast combinations may substantially improve portfolio selection.We find that the best-performing forecast combinations are those that either avoid estimating the pooling weights or that minimize the need for estimation. In practice, we report that the best-performing combination schemes are based on the principle of relative past forecasting performance. The economic gains from combining forecasts in portfolio management applications appear to be large, stable over time, and robust to the introduction of realistic transaction costs. © 2008 Emerald Group Publishing Ltd. All rights reserved.
Original languageEnglish
Title of host publicationFrontiers of Economics and Globalization|Front. Econ. Globalization
PublisherEmerald Publishing Limited
Pages595-655
Number of pages60
Volume3
DOIs
Publication statusPublished - 2008

Keywords

  • Forecast combination
  • Multivariate regime switching
  • Portfolio performance
  • Predictability

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