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Handbook of Economic Forecasting by Allan Timmermann, Graham Elliott

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Chapter 21

Advances in Forecasting under Instability

Barbara Rossi,     ICREA-UPF, Barcelona GSE and CREI

Abstract

The forecasting literature has identified two important issues: (i) several predictors have substantial and statistically significant predictive content, although only sporadically, and it is unclear whether this predictive content can be exploited reliably; (ii) in-sample predictive content does not necessarily translate into out-of-sample predictive ability, nor ensures the stability of the predictive relationship over time. The objective of this chapter is to understand what we have learned about forecasting in the presence of instabilities. The empirical evidence raises a multitude of questions. If in-sample tests provide poor ...

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