Christoffersen &diebold - Cointegration and Long Horizon Forecasting
Christoffersen &diebold - Cointegration and Long Horizon Forecasting
Christoffersen &diebold - Cointegration and Long Horizon Forecasting
(1998),
"Cointegration and Long-Horizon Forecasting,"
Journal of Business and Economic Statistics, 16, 450-458.
Peter F. Christoffersen
Research Department, International Monetary Fund, Washington, DC 20431
([email protected])
Francis X. Diebold
Department of Economics, University of Pennsylvania, Philadelphia, PA 19104
and NBER ([email protected])
1. INTRODUCTION
This paper grew out of an attempt to reconcile the popular intuition sketched
above, which seems sensible, with a competing conjecture, which also seems sensible.
Forecast enhancement from exploiting cointegration comes from using information in the
current deviations from the cointegrating relationships. That is, knowing whether and by
how much the cointegrating relations are violated today is valuable in assessing where the
variables will go tomorrow, because deviations from cointegrating relations tend to be
eliminated. However, although the current value of the error-correction term clearly
provides information about the likely near-horizon evolution of the system, it seems
unlikely that it provides information about thelong-horizon evolution of the system,
because the long-horizon forecast of the error-correction term is always zero. (The
error-correction term, by construction, is covariance stationary with a zero mean.) From
this perspective, it seems unlikely that cointegration could be exploited to improve long-
horizon forecasts.
(1 L)xt µ C(L) t,
where µ is a constant drift term, C(L) is an NxN matrix lag operator polynomial of
possibly infinite order, and t is a vector of i.i.d. innovations. Then, under regularity
conditions, the existence of r linearly independent cointegrating vectors is equivalent to
rank(C(1)) = N-r, and the cointegrating vectors are given by the rows of the rxN matrix ,
where C(1) = µ = 0. That is, z= t xt is an r-dimensional stationary zero-mean time
series. We will assume that the system is in fact cointegrated, with 0<rank(C(1))<N. For
future reference, note that following Stock and Watson (1988) we can use the
decomposition C(L) C(1) (1 L)C (L), where Cj Ci, to write the system in
i j 1
“common-trends” form,
xt µt C(1) t C (L) t,
t
where t i.
i 1
one imposes the cointegrating restrictions and allows for correlated error terms across
equations, and the other does not.
We will make heavy use of a ubiquitous forecast accuracy measure, mean squared
error, the multivariate version of which is
MSE E(et hKet h),
where K is an NxN positive definite symmetric matrix andet h is the vector of h-step-ahead
forecast errors. MSE of course depends on the weighting matrix K. It is standard to set
K=I, in which case
MSE E(et het h) trace( h),
where h var(et h) . We call this the “trace MSE” accuracy measure. To compare the
accuracy of two forecasts, say 1 to 2, it is standard to examine the ratio
1 2
trace( h)/ trace( h) which we call the “trace MSE ratio.”
From the moving average representation, we can unravel the process recursively
from time t+h to time 1 and write
t t h i h h i
xt h (t h)µ Cj i Cj t i,
i 1 j 0 i 1 j 0
we get that
lim x̂t h 0,
h
êt h xt h x̂t h.
From the definition of êt h we can also see that the system forecast errors satisfy
h
êt h
êt h 1
Ch i t i
C(L) t h
,
i 1
where the last equality holds if we take j=0 for all j<t. That is, when we view the system
forecast error process as a function of the forecast horizon, h, it has the same stochastic
structure as the original process, x,t and therefore is integrated and cointegrated.
Consequently, the variance of the h-step ahead forecast errors from the cointegrated
system is of order h, that is increasing at the rate h,
var[êt h] O(h).
In contrast, the cointegrating combinations of the system forecast errors, just as the error-
correction process z,t will have finite variance for large h,
where the matrix Q is a constant function of the stationary component of the forecast
error. Although individual series can only be forecast with increasingly wide confidence
intervals, the cointegrating combination has a confidence interval of finite width, even as
the forecast horizon goes to infinity.
Now consider ignoring the multivariate features of the system, forecasting instead
using the implied univariate representations. We can use Wold’s decomposition theorem
and write for any series (the n-th, say),
(1 L)xn,t µn n,jun,t j,
j 0
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where n,0 = 1 and un,t is white noise. It follows from this expression that the univariate
time-t forecast for period t+h is,
h h 1
x̃n,t h hµn xn,t n,i un,t n,i un,t 1 ...
i 1 i 2
where (L) is a diagonal matrix polynomial with the individual n(L)’s on the diagonal.
Now let us consider the errors from the univariate forecasts. We will rely on the
following convenient orthogonal decomposition
ẽt h xt h x̃t h (xt h x̂t h) (x̂t h x̃t h) êt h (x̂t h x̃t h).
where the approximation holds as h gets large. Using univariate forecasts, the
decomposition for ẽt h , and the approximate long-horizon system forecast, we get
Notice that the t’s are serially uncorrelated and the u’st only depend on current
and past t’s; thus, êt h is orthogonal to the terms in the parenthesis. Notice also that the
term inside the parenthesis term is just a sum of stationary series and is therefore
stationary; furthermore, its variance is constant as the forecast horizon h changes. We can
therefore write the long-horizon variance of the univariate forecasts as
which is of the same order of magnitude as the variance of thesystem forecast errors.
Furthermore, since the dominating terms in the numerator and denominator are identical,
the trace MSE ratio goes to one as formalized in the following proposition:
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Proposition 1
trace(var(ẽt h))
lim 1.
h trace(var(êt h))
When comparing accuracy using the trace MSE ratio, the univariate forecasts
perform as well as the cointegrated system forecasts as the horizon gets large. This is the
opposite of the folk wisdom—it turns out that imposition of cointegrating restrictions
helps at short, but not long, horizons. Quite simply, when accuracy is evaluated with the
trace MSE ratio, there is no long-horizon benefit from imposing cointegration; all that
matters is getting the level of integration right.
Proposition 1 provides the theoretical foundation for the results of Hoffman and
Rasche (1996), who find in an extensive empirical application that imposing cointegration
does little to enhance long-horizon forecast accuracy, and Brandner and Kunst (1990),
who suggest that when in doubt about how many unit roots to impose in a multivariate
long-horizon forecasting model, it is less harmful to impose too many than to impose too
few. A similar result can be obtained by taking the ratio of Clements and Hendry’s (1995)
formulas for the MSE at horizon h from the system forecasts and the MSE of forecasts
that they construct that correspond approximately to those from a misspecified VAR in
differences.
Again we can rely on the orthogonality of êt h to the terms in the parenthesis. The first
term, êt h, has finite variance, as discussed above. So too do the terms in the parenthesis,
because they are linear combinations of stationary processes. Thus we have
Proposition 2
var( ẽt h) Q var(C (L) t (L)ut) O(1).
The cointegrating combinations of the long-horizon errors from the univariate forecasts,
which completely ignore cointegration, also have finite variance. Thus, it is in fact not
imposition of cointegration on the forecasting system that yields the finite variance of the
cointegrating combination of the errors; rather it is the cointegration property inherent in
the system itself, which is partly inherited by the correctly specified univariate forecasts.
-8-
3. A SIMPLE EXAMPLE
yt xt vt,
where the disturbances are orthogonal at all leads and lags. The moving average
representation is
xt µ 1 0 t µ t
(1 L) C(L) ,
yt µ 1 L vt µ vt
The system’s simplicity allows us to compute exact formulae that correspond to the
qualitative results derived in the previous section.
Let us first derive the implied univariate representations for x and y. The univariate
representation for x is of course a random walk with drift, exactly as given in the first
equation of the system,
xt µ xt 1 t.
Derivation of the univariate representation for y is a bit more involved. From the moving-
average representation of the system, rewrite the process for yt as a univariate two-shock
process,
yt µ yt 1 (1 L)vt t
µ yt 1
zt,
z( ) 0, 2.
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2 2
where q / v is the signal to noise ratio. This is exactly the autocorrelation structure
of an MA(1) process, so we write zt ut 1 ut. To find the value for , we match
autocorrelations at lag 1, yielding
1
.
2
1 2 2q
4 2
(1/2)[ q 4 2q 2 2
q].
2 2
Although suppressed in the notation, will be a function of q / v and throughout.
Finally, we find the variance of the univariate innovation by matching the variances,
yielding
2 2 2 2 2 2 2
(1 ) u 2 v v(2 q),
or
2 2
2 v(2 q)
u .
2
(1 )
3.2 Forecasts From the Multivariate Cointegrated System
First consider forecasting from the multivariate cointegrated system. Write the time
t+h values in terms of time t values and future innovations as
h
xt h µh xt t i
i 1
h
yt h (µh xt) t i vt h .
i 1
ŷt h
µh xt,
h
êx,t h t i
i 1
h
êy,t h t i vt h .
i 1
Note that the forecast errors follow the same stochastic process as the original system
(aside from the drift term),
t h 1 0 t h t h
(1 L)êt h C(L) .
t h (1 L)vt h 1 L vt h vt h
2 2 2
var(êy,t h) h v.
Both forecast error variances are O(h). As for the variance of the cointegrating
combination, we have
h h
2
var[êy,t h êx,t h] var t i vt h t i v,
i 1 i 1
for all h, because there are no short run dynamics. Similarly, the forecasts satisfy the
cointegrating relationship at all horizons, not just in the limit. That is,
ŷt h
x̂t h
0, h 1, 2, ...
Now consider forecasting from the implied univariate models. Immediately, the
univariate forecast for x is the same as the system forecast,
x̃t h µh xt.
Thus,
h
ẽx,t h êx,t h t i,
i 1
so that
2
var(ẽx,t h) var(êx,t h) h O(h).
h h
yt h µh yt zt i µh yt ut ut 1 zt i.
i 1 i 2
Notice in particular that the univariate forecast error variance is O(h), as is the system
forecast error variance.
2
var[ẽy,t h ẽx,t h] var(ẽy,t h) var(ẽx,t h) 2 cov ẽy,t h, ẽx,t h .
2
The second variance term is simply h . To evaluate the first variance term we write
2 2
var(ẽy,t h) [(1 )2(h 1) 1] u [(1 )2h (2 )] u.
2
Substituting for u, and using the fact that
1 (1 )2 2
q
,
2 2 2 2
1 2 q 1 2 q
we get
(1 )2 2 2 2 2
var(ẽy,t h) h v(2 q) [ 2qh 2 ] v.
2 2
1 1
To evaluate the covariance term, use the fact that
Now recall the formula for the forecast error of x and the fact that future values of are
uncorrelated with future and current values of v, and with current values of u, so that
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h h
2
cov ẽy,t h, ẽx,t h E t i vt h vt ut t i h .
i 1 i 1
which of course accords with our general result derived earlier that the variance of the
cointegrating combination of univariate forecast errors is finite.
Finally, compare the forecast error variances from the multivariate and univariate
representations. Of course x has the same representation in both, so the comparison hinges
on y. We must compare
2 2 2 2 2
var(êy,t h) h v v[ qh 1]
to
2
var(ẽy,t h) [ 2qh 2 ] v.
Thus,
2
var(ẽy,t h) var(êy,t h) (1 ) v.
The error variance of the univariate forecast is greater than that of the system forecast, but
it grows at the same rate.
In Figure 1 we show the values of this ratio as h gets large, for q = = 1. Note in
particular the speed with which the limiting result,
trace(var(ẽt h))
lim 1,
h trace(var(êt h))
obtains.
In closing this section, we note that in spite of the fact that the trace MSE ratio
approaches 1, the ratio of the variances of the cointegrating combinations of the forecast
errors does not approach 1 in this simple model; rather,
var[ẽy,t h ẽx,t h]
(2 ) > 1, h, q.
var[êy,t h êx,t h]
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This observation turns out to hold quite generally, and it forms the basis for an alternative
class of accuracy measures, to which we now turn.
One might argue, however, that the system forecasts are nevertheless more
appealing because “... the forecasts of levels of co-integrated variables will ‘hang
together’ in a way likely to be viewed as sensible by an economist, whereas forecasts
produced in some other way, such as by a group of individual, univariate Box-Jenkins
models, may well not do so” (Granger and Newbold 1986, p. 226). But as we have seen,
univariate Box-Jenkins forecasts do hang together if the variables are cointegrated—the
cointegrating combinations, and only the cointegrating combinations, of univariate
forecast errors have finite variance.
Such effects are lost on standard accuracy measures like trace MSE, however,
because the loss functions that underlie them do not explicitly value maintaining the
multivariate long-run relationships of long-horizon forecasts. The solution is obvious—if
we value maintenance of the cointegrating relationship, then so too should the loss
functions underlying our forecast accuracy measures. One approach, in the spirit of
Granger (1996), is to focus on forecasting the cointegrating combinations of the variables,
and to evaluate forecasts in terms of the variability of the cointegrating combinations of
the errors, et+h.
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“Economic models often imply that variables are cointegrated with simple
and known cointegrating vectors. Examples include the neoclassical growth
model, which implies that income, consumption, investment, and the capital
stock will grow in a balanced way, so that any stochastic growth in one of
the series must be matched by corresponding growth in the others. Asset
pricing models with stable risk premia imply corresponding stable
differences in spot and forward prices, long- and short-term interest rates,
and the logarithms of stock prices and dividends. Most theories of
international trade imply long-run purchasing power parity, so that long-run
movements in nominal exchange rates are matched by countries’ relative
price levels. Certain monetarist propositions are centered around the
stability of velocity, implying cointegration among the logarithms of
money, prices and income. Each of these theories has distinct implications
for the properties of economic time series under study: First, the series are
cointegrated, and second, the cointegrating vector takes on a specific value.
For example, balanced growth implies that the logarithms of income and
consumption are cointegrated and that the cointegrating vector takes on the
value of (1, -1).”
Thus, although the assumption of a known cointegrating vector certainly involves a loss of
generality, it is nevertheless legitimate in a variety of empirically- and economically-
relevant cases. This is fortunate because of problems associated with identification of
cointegrating vectors in estimated systems, as stressed in Wickens (1996). We will
maintain the assumption of a known cointegration vector throughout this paper, reserving
for subsequent work an exploration of the possibility of analysis using consistent estimates
of cointegrating vectors.
where K = . Thus the trace MSE of the cointegrating combinations of the forecast
errors is in fact a particular variant of MSE formulated on the raw forecast errors, E(eKe)
= trace(K h) , where the weighting matrix K = is of (deficient) rank r (< N), the
cointegrating rank of the system.
4.3 Accuracy Measures III: Trace MSE from the Triangular Representation
The problem with the traditional E(eKe) approach with K = I is that, although it
values small MSE, it fails to value the long-run forecasts’ hanging together correctly.
Conversely, a problem with the E(eKe) approach with K = is that it values only the
long-run forecasts’ hanging together correctly, whereas both pieces seem clearly relevant.
The challenge is to incorporate both pieces into an overall accuracy measure in a natural
way, and an attractive approach for doing so follows from the triangular representation of
cointegrated systems exploited by Campbell and Shiller (1987) and Phillips (1991).
Clements and Hendry (1995) provide a numerical example that illustrates the appeal of the
triangular representation for forecasting. Below we provide a theoretical result that
establishes the general validity of the triangular approach for distinguishing between naive
univariate and fully specified system forecasts.
From the fact that has rank r, it is possible to rewrite the system so that the N
left-hand-side variables are the r error-correction terms followed by the differences of N-r
integrated but not cointegrated variables. That is, we rewrite the system in terms of
x1t x2t
,
(1 L)x2t
where the variables have been rearranged and partitioned into xt (x1t, x2t) , where
( ) and the variables in x2t are integrated but not cointegrated. We then evaluate
accuracy in terms of the trace MSE of forecastsfrom the triangular system,
Recall Proposition 1, which says that under trace MSE, long-horizon forecast
accuracy from the cointegrated system is no better than that from univariate models. We
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now show that under trace MSEtri, long-horizon forecast accuracy from the cointegrated
system is always better than that from univariate models.
Proposition 3
˜
trace MSEtri
lim > 1.
h ˆ
trace MSEtri
Proof: Consider a cointegrated system in triangular form, that is, a system such that = [
I - ]. We need to show that for large h,
r N r N
var[ iêt h] var[(1 L)êj,t h] < var[ iẽt h] var[(1 L)ẽj,t h]
i 1 j r 1 i 1 j r 1
and
r N
var[ iêt h] var[(1 L)êj,t h] < .
i 1 j r 1
where Q var(êt h), S var(C (L) t (L)ut), and from which it follows that
r r
var[ iẽt h] var[ iêt h] trace( S ) > 0,
i 1 i 1
so that
h 1 h 1
var[(1 L)êt h] Cj Cj C(1) C(1) as h .
j 0 j 0
Let CN-r(1) be the last N-r rows of C(1); then altogether we have
r N
var[ iêt h] var[(1 L)êj,t h] trace( Q ) trace(CN r(1) CN r(1) ) < ,
i 1 j r 1
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In our simple bivariate example all we have to do to put the system in the
triangular form sketched above is to switch x and y in the autoregressive representation,
yielding
1 yt 0 vt
.
0 1 L xt µ t
Thus we see that the trace MSEtri ratio does not approach one as the horizon increases; in
particular, it is constant and above one for all h,
˜
trace MSE 1 (2 )q (1 )q
tri
1 > 1, h.
ˆ
trace MSE 1 q 1 q
tri
2 2
In Figure 2 we plot the trace MSEtri ratio vs. h, for =1 and v q 1 . In this case, the
ratio is simply a constant (> 1) for all h since the systems contains no short-run dynamics.
Let us first consider an analog of our theoretical results, except that we now
estimate parameters instead of assuming them known. In Figure 3 we plot the trace MSE
ratio and the trace MSEtri ratio against the forecast horizon, h. Using estimated parameters
changes none of the theoretical results reached earlier under the assumption of known
parameters. Use of the trace MSE ratio obscures the long-horizon benefits of imposing
cointegration, whereas use of trace MSEtri reveals those benefits clearly.
How then can we reconcile our results with those of Engle and Yoo (1987) and the
many subsequent authors who conclude that imposing cointegration produces superior
long-horizon forecasts? The answer is two-part: Engle and Yoo make a different and
harder-to-interpret comparison than we do, and they misinterpret the outcome of their
Monte Carlo experiments.
First consider the forecast comparison. We have thus far compared forecasts from
univariate models (which impose integration) to forecasts from the cointegrated system
(which impose both integration and cointegration). Thus a comparison of the forecasting
results isolates the effects of imposing cointegration. Engle and Yoo, in contrast, compare
forecasts from a VAR in levels (which imposeneither integration nor cointegration) to
forecasts from the cointegrated system (which imposeboth integration and cointegration).
Thus differences in forecasting performance in the Engle-Yoo setup cannot necessarily be
attributed to the imposition of cointegration—instead, they may simply be due to
imposition of integration, irrespective of whether cointegration is imposed.
Now consider the interpretation of the results. The VAR in levels is of course
integrated, but estimating the system in levels entails estimating the unit root. Although
many estimators are consistent, an exact finite-sample unit root is a zero-probability event.
Unfortunately, even a slight and inevitable deviation of the estimated root from unity
pollutes forecasts from the estimated model, and the pollution increases with h. This in
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turn causes the MSE ratio to increase in h when comparing a levels VAR forecast to a
system forecast or any other forecast that explicitly imposes unit roots. The problem is
exacerbated by bias of the Dickey-Fuller-Hurwicz type; see Stine and Shaman (1989),
Pope (1990), Abadir (1993) and Abadir, Hadri and Tzavalis (1996) for detailed
treatments.
It is no surprise that forecasts from the VAR estimated in levels perform poorly,
with performance worsening with horizon, as shown Figure 4. It is tempting to attribute
the poor performance of the VAR in levels to its failure to impose cointegration, as do
Engle and Yoo. The fact is, however, that the VAR in levels performs poorly because it
fails to impose integration, not because it fails to impose cointegration—estimation of the
cointegrated system simply imposes the correct level of integrationa priori. To see this,
consider Figure 5, in which we compare the forecasts from an estimated VAR in
differences to the forecasts from the estimated cointegrated system. At long horizons, the
forecasts from the VAR in differences, which impose integration but completely ignore
cointegration, perform just as well. In contrast, if we instead evaluate forecast accuracy
with the trace MSEtri ratio that we have advocated, the forecasts from the VAR in
differences compare poorly at all horizons to those from the cointegrated system, as
shown in Figure 6.
In the simple bivariate system, we are restricted to studying models with exactly
one unit root and one cointegration relationship. It is also of interest to examine richer
systems; conveniently, the literature already contains relevant (but unnoticed) evidence,
which is entirely consistent with our theoretical results. Reinsel and Ahn (1992) and Lin
and Tsay (1996), in particular, provide Monte Carlo evidence on the comparative
forecasting performance of competing estimated models. Both study a four-variable
VAR(2), with two unit roots and two cointegrating relationships. Their results clearly
suggest that under the trace MSE accuracy measure, one need only worry about imposing
enough unit roots on the system. Imposing three (one too many) unit roots is harmless at
any horizon, and imposing four unit roots (two too many, so that the VAR is in
differences) is harmless at long horizons. As long as one imposes enough unit roots, at
least two in this case, the trace MSE ratio will invariably go to one as the horizon
increases.
First, we have shown that imposing cointegration does not improve long-horizon
forecast accuracy when forecasts of cointegrated variables are evaluated using the
standard trace MSE ratio. Ironically enough, although cointegration implies restrictions on
low-frequency dynamics, imposing cointegration is helpful for short- but not long-horizon
forecasting, in contrast to the impression created in the literature. Imposition of
cointegration on an estimated system, when the system is in fact cointegrated, helps the
accuracy of long-horizon forecasts relative to those from systems estimated in levels with
no restrictions, but that is because of the imposition of integration, not cointegration.
Univariate forecasts in differences do just as well! We hasten to add, of course, that the
result is conditional on the assumption that the univariate representations of all variables
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do in fact contain unit roots. Differencing a stationary variable with roots close to unity
has potentially dire consequences for long-horizon forecasting, as argued forcefully by
Lin and Tsay (1996).
Second, we have shown that the variance of the cointegrating combination of the
long-horizon forecast errors is finite regardless of whether cointegration is imposed. The
variance of the error in forecasting the cointegrating combinationis smaller, however, for
the cointegrated system forecast errors. This suggests that accuracy measures that value
the preservation of long-run relationships should be defined, in part, on the cointegrating
combinations of the forecast errors. We explored one such accuracy measure based on the
triangular representation of the cointegrated system.
Third, we showed that our theoretical results are entirely consistent with several
well-known Monte Carlo analyses, whose interpretation we clarified. The existing Monte
Carlo results are correct, but their widespread interpretation is not. Imposition of
integration, not cointegration, is responsible for the repeated finding that the long-horizon
forecasting performance of cointegrated systems is better than that of VARs in levels.
We hasten to add that the message of this paper isnot that cointegration is of no
value in forecasting. First, even under the conventional trace MSE accuracy measure,
imposing cointegration does improve forecasts. Our message is simply that under the
conventional accuracy measure it does so at short and moderate, not long, horizons, in
contrast to the folk wisdom. Second, in our view, imposing cointegration certainlymay be
of value in long-horizon forecasting—the problem is simply that standard forecast
accuracy measures do not reveal it.
The upshot is that in forecast evaluation we need to think hard about what
characteristics make a good forecast good, and how best to measure those characteristics.
In that respect this paper is in the tradition of our earlier work, such as Diebold and
Mariano (1995), Diebold and Lopez (1996), and Christoffersen and Diebold (1996, 1998),
in which we argue the virtues of tailoring accuracy measures in applied forecasting to the
specifics of the problem at hand. Seemingly omnibus measures such as trace MSE,
although certainly useful in many situations, are inadequate in others.
trace MSE that explicitly value preservation of cointegrating relationships, rather then
simply processing the trace MSE differently. As the forecast horizon grows, the trace
MSE difference becomes negligible relative to either the system or the univariate trace
MSE, so that the trace MSE difference would appear to place too little value on preserving
cointegrating relationships.
ACKNOWLEDGMENTS
We thank the Co-Editor (Ruey Tsay), an Associate Editor, and two referees for
detailed and constructive comments. Helpful discussion was also provided by Dave
DeJong, Rob Engle, Clive Granger, Bruce Hansen, Dennis Hoffman, Laura Kodres, Jim
Stock, Charlie Thomas, Ken Wallis, Chuck Whiteman, Mike Wickens, Tao Zha, and
participants at the July 1996 NBER/NSF conference on Forecasting and Empirical
Methods in Macroeconomics. All remaining inadequacies are ours alone. We thank the
International Monetary Fund, the National Science Foundation, the Sloan Foundation and
the University of Pennsylvania Research Foundation for support. The views in this article
do not necessarily represent those of the International Monetary Fund.
Figure 1. Trace MSE Ratio of Univariate vs. System Forecasts Plotted Against
Forecast Horizon, Bivariate System with Cointegration Parameter =1 and Signal to
Noise Ratio q=1
Figure 2. Trace MSE tri Ratio of Univariate vs. System Forecasts Plotted Against
Forecast Horizon, Bivariate System with Cointegration Parameter =1 and Signal to
Noise Ratio q=1
Figure 3. Trace MSE Ratio and Trace MSE tri Ratio of Univariate vs. System
Forecasts Plotted Against Forecast Horizon, Bivariate System with Estimated
Parameters
Figure 4. Trace MSE Ratio of Levels VAR vs. Cointegrated System Forecasts Plotted
Against the Forecast Horizon, Bivariate System with Estimated Parameters
Figure 5. Trace MSE Ratio of Differenced VAR vs. Cointegrated System Forecasts
Plotted Against Forecast Horizon, Bivariate System with Estimated Parameters
Figure 6. Trace MSE tri Ratio of Differenced VAR vs. Cointegrated System Forecasts
Plotted Against Forecast Horizon, Bivariate System with Estimated Parameters
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