Use the data in INTQRT.RAW for this exercise. (i) Using the data from all but the last
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(i) Using the data from all but the last four years (16 quarters), estimate an AR(1) model for Δr6t. (We use the difference because it appears that r6t has a unit root.) Find the RMSE of the one-step-ahead forecasts for Δr6, using the last 16 quarters.
(ii) Now, add the error correction term sprt-1 = r6t-1 - r3t-1 to the equation from part (i). (This assumes that the co integrating parameter is one.) Compute the RMSE for the last 16 quarters. Does the error correction term help with out-of-sample forecasting in this case?
(iii) Now, estimate the co integrating parameter, rather than setting it to one. Use the last 16 quarters again to produce the out-of-sample RMSE. How does this compare with the forecasts from parts (i) and (ii)?
(iv) Would your conclusions change if you wanted to predict r6 rather than Δr6? Explain.
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Introductory Econometrics A Modern Approach
ISBN: 978-0324660548
4th edition
Authors: Jeffrey M. Wooldridge
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