School of Economics and Finance

No. 567: Forecasting Using Predictive Likelihood Model Averaging

George Kapetanios , Queen Mary, University of London
Vincent Labhard , Bank of England
Simon Price , Bank of England and City University

September 1, 2006

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Recently, there has been increasing interest in forecasting methods that utilise large datasets. We explore the possibility of forecasting with model averaging using the out-of-sample forecasting performance of various models in a frequentist setting, using the predictive likelihood. We apply our method to forecasting UK inflation and find that the new method performs well; in some respects it outperforms other averaging methods.

J.E.L classification codes: C110, C150, C530

Keywords:Forecasting, Inflation, Bayesian model averaging, Akaike criterion, Forecast combining