Forecasting with serially correlated regression models

Abstract

In this article we investigate the asymptotic and finite-sample properties of predictors of regression models with autocorrelated errors. We prove new theorems associated with the predictive efficiency of generalized least squares (GLS) and incorrectly structured GLS predictors. We also establish the form associated with their predictive mean squared errors as well as the magnitude of these errors relative to each other and to those generated from the ordinary least squares (OLS) predictor. A large simulation study is used to evaluate the finite-sample performance of forecasts generated from models using different corrections for the serial correlation.

Keywords:

• Asymptotic mean squared errors
• Autoregressive disturbances
• Generalized least squares
• Incorrect generalized least squares
• Predictive mean squared efficiency
• Simulation