Forecasting Using Bayesian and Information Theoretic Model Averaging: An Application to UK Inflation

45 Pages Posted: 19 Oct 2005

See all articles by George Kapetanios

George Kapetanios

King's College, London

Vincent Labhard

European Central Bank (ECB) - Directorate General Economics

Simon Price

Essex Business School; City University London - Department of Economics

Date Written: July 2005

Abstract

In recent years, there has been increasing interest in forecasting methods that utilise large data sets, driven partly by the recognition that policymaking institutions need to process large quantities of information. Factor analysis is a popular way of doing this. Forecast combination is another, and it is on this that we concentrate. Bayesian model averaging methods have been widely employed in this area, but a neglected alternative approach employed in this paper uses information theoretic based weights. We consider the use of model averaging in forecasting UK inflation with a large data set from this perspective. We find that an information theoretic model averaging scheme can be a powerful alternative both to the more widely used Bayesian model averaging scheme and to factor models.

Keywords: Forecasting, inflation, Bayesian model averaging, Akaike criteria, forecast combining

JEL Classification: C11, C15, C53

Suggested Citation

Kapetanios, George and Labhard, Vincent and Price, Simon G., Forecasting Using Bayesian and Information Theoretic Model Averaging: An Application to UK Inflation (July 2005). Bank of England Working Paper No. 268, Available at SSRN: https://ssrn.com/abstract=824726 or http://dx.doi.org/10.2139/ssrn.824726

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Vincent Labhard (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Simon G. Price

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

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