Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2009-07-16 Number: 09-061/4 Author-Name: Lennart Hoogerheide Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Richard Kleijn Author-Workplace-Name: PGGM, Zeist Author-Name: Francesco Ravazzolo Author-Workplace-Name: Norges Bank Author-Name: Herman K. van Dijk Author-Workplace-Name: Erasmus University Rotterdam Author-Name: Marno Verbeek Author-Workplace-Name: Erasmus University Rotterdam Title: Forecast Accuracy and Economic Gains from Bayesian Model Averaging using Time Varying Weights Abstract: This discussion paper led to a publication in 'Journal of Forecasting', 2010, 29(1-2), 251-269. Several Bayesian model combination schemes, including some novel approaches that simultaneously allow for parameter uncertainty, model uncertainty and robust time varying model weights, are compared in terms of forecast accuracy and economic gains using financial and macroeconomic time series. The results indicate that the proposed time varying model weight schemes outperform other combination schemes in terms of predictive and economic gains. In an empirical application using returns on the S&P 500 index, time varying model weights provide improved forecasts with substantial economic gains in an investment strategy including transaction costs. Another empirical example refers to forecasting US economic growth over the business cycle. It suggests that time varying combination schemes may be very useful in business cycle analysis and forecasting, as these may provide an early indicator for recessions. Classification-JEL: C11, C15, C22, C53, G11 Keywords: forecast combination, Bayesian model averaging, time varying model weights, portfolio optimization, business cycle File-Url: https://papers.tinbergen.nl/09061.pdf File-Format: application/pdf File-Size: 355611 bytes Handle: RePEc:tin:wpaper:20090061