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A comparison of forecasting performance between ECM and the difference ARX model



Using Monte Carlo simulations, we compare the forecasting performance of the single equation error correction model (SEECM) with that of the (misspecified) difference autoregressive model with exogenous variables (ARX). The main result of the article is that the SEECM produces superior forecasts for short horizons, but not for long horizons, as shown analytically by Christoffersen and Diebold (1999).

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