Forecast combination and encompassing: Reconciling two divergent literatures

Forecast combination and encompassing : Reconciling two divergent literatures *

The relationship of forecast combination to recent developments in the theory and practice of model selection (in particular, the encompassing literature) is explored, the pragmatic virtues of forecast combination are argued, and a synthesis is attempted. Promising areas for future research, particularly exploration and development of forecast combination methodologies that facilitate ‘shrinkag...

Forecast Encompassing Tests and Probability Forecasts

We consider tests of forecast encompassing for probability forecasts, for both quadratic and logarithmic scoring rules. We propose test statistics for the null of forecast encompassing, present the limiting distributions of the test statistics, and investigate the impact of estimating the forecasting models’ parameters on these distributions. The small-sample performance is investigated, in ter...

Forecasting combination and encompassing tests

In this paper we demonstrate that forecast encompassing tests are valuable tools in getting an insight into why competing forecasts may be combined to produce a composite forecast which is superior to the individual forecasts. We also argue that results from forecast encompassing tests are potentially useful in model specification. We illustrate this using forecasts of quarterly UK consumption ...

Tests of Equal Forecast Accuracy and Encompassing for Nested Models

We examine the asymptotic and finite-sample properties of tests for equal forecast accuracy and encompassing applied to 1-step ahead forecasts from nested parametric models. We first derive the asymptotic distributions of two standard tests and one new test of encompassing. Tables of asymptotically valid critical values are provided. Monte Carlo methods are then used to evaluate the size and po...

Forecast Evaluation and Combination