The Out-of-sample Performance of an Exact Median-Unbiased Estimator for the Near-Unity AR(1) Model

Medel, Carlos and Pincheira, Pablo (2015): The Out-of-sample Performance of an Exact Median-Unbiased Estimator for the Near-Unity AR(1) Model.

Abstract

We analyse the multihorizon forecasting performance of several strategies to estimate the stationary AR(1) model in a near-unity context. We focus on the Andrews' (1993) exact median-unbiased estimator (BC), the OLS estimator, and the driftless random walk (RW). In addition, we explore the forecasting performance of pairwise combinations between these individual strategies. We do this to investigate whether the Andrews' (1993) correction of the OLS downward bias helps in reducing mean squared forecast errors. Via simulations, we find that BC forecasts typically outperform OLS forecasts. When BC is compared to the RW we obtain mixed results, favouring the latter as the persistence of the true process increases. Interestingly, we also find that the combination of BC and RW performs well when the persistence of the process is high.

• Item Type: MPRA Paper
• Language: English
• Keywords: Near-unity autoregression; median-unbiased estimation; unbiasedness; unit root model; forecasting; forecast combinations
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation Modeling

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