Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2017-04-18
Number: 17-039/III
Author-Name: Tom Boot
Author-Email: t.boot@rug.nl
Author-Workplace-Name: University of Groningen
Author-Name: Andreas Pick
Author-Email: andreas.pick@cantab.net
Author-Workplace-Name: Erasmus University Rotterdam, De Nederlandsche Bank and CESifo Institute
Title: A near optimal test for structural breaks when forecasting under square error loss
Abstract: We propose a near optimal test for structural breaks of unknown timing when the purpose of the analysis is to obtain accurate forecasts under square error loss. A bias-variance trade-off exists under square forecast error loss, which implies that small structural breaks should be ignored. We study critical break sizes, assess the relevance of the break location, and provide a test to determine whether modeling a break will improve forecast accuracy. Asymptotic critical values and near optimality properties are established allowing for a break under the null, where the critical break size varies with the break location. The results are extended to a class of shrinkage forecasts with our test statistic as shrinkage constant. Empirical results on a large number of macroeconomic time series show that structural breaks that are relevant for forecasting occur much less frequently than indicated by existing tests.
Classification-JEL: C12, C53
Keywords: structural break test, forecasting, squared error loss
File-Url: https://papers.tinbergen.nl/17039.pdf
File-Format: application/pdf
File-Size: 570376 bytes
Handle: RePEc:tin:wpaper:20170039