Working Paper: NBER ID: w29635
Authors: Francis X. Diebold; Minchul Shin; Boyuan Zhang
Abstract: We propose methods for constructing regularized mixtures of density forecasts. We explore a variety of objectives and regularization penalties, and we use them in a substantive exploration of Eurozone inflation and real interest rate density forecasts. All individual inflation forecasters (even the ex post best forecaster) are outperformed by our regularized mixtures. From the Great Recession onward, the optimal regularization tends to move density forecasts' probability mass from the centers to the tails, correcting for overconfidence.
Keywords: density forecasts; regularization; eurozone inflation; real interest rates
JEL Codes: C01; C53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regularization methods (C51) | Improved predictive accuracy (C52) |
| Regularization (C51) | Shift probability mass from the center to the tails (C46) |
| Shift probability mass from the center to the tails (C46) | Enhanced reliability of forecasts (C53) |