Mitchell, J., Robertson, D. and Wright, S.

R² bounds for predictive models: what univariate properties tell us about multivariate predictability

Journal of Business and Economic Statistics

pp. 1-15 (2018)

Abstract: A long-standing puzzle in macroeconomic forecasting has been that a wide variety of multivariate models have struggled to out-predict univariate models consistently. We seek an explanation for this puzzle in terms of population properties. We derive bounds for the predictive R2 of the true, but unknown, multivariate model from univariate ARMA parameters alone. These bounds can be quite tight, implying little forecasting gain even if we knew the true multivariate model. We illustrate using CPI inflation data.

Keywords: Autoregressive moving average represenations, Forecasting, Macroeconomic models, Nonfundamental representations, Predictive regressions, Time-varying ARMA

Author links: Donald Robertson  

Publisher's Link: https://doi.org/10.1080/07350015.2017.1415909