STATA Guide for Introductory Econometrics for Finance by Brooks Chris

Author:Brooks, Chris [Brooks, Chris]
Language: eng
Format: epub
Publisher: Cambridge University Press
Published: 2019-03-27T16:00:00+00:00

Figure 66: Graph Comparing the Static and Dynamic Forecasts with the Actual Series

Let us have a closer look at the graph. For the dynamic forecasts, it is clearly evident that the forecasts quickly converge upon the long-term unconditional mean value as the horizon increases. Of course, this does not occur with the series of 1-step-ahead forecasts which seem to more closely resemble the actual ‘dhp’ series.

A robust forecasting exercise would of course employ a longer out-of-sample period than the two years or so used here, would perhaps employ several competing models in parallel, and would also compare the accuracy of the predictions by examining the forecast error measures, such as the square root of the mean squared error (RMSE), the MAE, the MAPE, and Theil’s U-statistic. Unfortunately, there is no built-in function in Stata to compute these statistics so they would need to be created manually by generating new data series for each of the statistics. 52

52 You can find the formulae to generate the forecast error statistics in Brooks ( 2019 ).

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