Discussion paper

DP4649 Optimal Forecast Combination Under Regime Switching

This Paper proposes a new forecast combination method that lets the combination weights be driven by regime switching in a latent state variable. An empirical application that combines forecasts from survey data and time series models finds that the proposed regime switching combination scheme performs well for a variety of macroeconomic variables. Monte Carlo simulations shed light on the type of data generating processes for which the proposed combination method can be expected to perform better than a range of alternative combination schemes. Finally, we show how time-variations in the combination weights arise when the target variable and the predictors share a common factor structure driven by a hidden Markov process.


Timmermann, A and G Elliott (2004), ‘DP4649 Optimal Forecast Combination Under Regime Switching‘, CEPR Discussion Paper No. 4649. CEPR Press, Paris & London. https://cepr.org/publications/dp4649