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A comparison of linear forecasting models and neural networks: an application to Euro inflation and Euro Divisia

Binner, Jane M.; Bissoondeeal, Rakesh K.; Elger, Thomas LU ; Gazely, Alicia M. and Mullineux, Andrew W. (2005) In Applied Economics 37(6). p.665-680
Abstract
Linear models reach their limitations in applications with nonlinearities in the data. In this paper new empirical evidence is provided on the relative Euro inflation forecasting performance of linear and non-linear models. The well established and widely used univariate ARIMA and multivariate VAR models are used as linear forecasting models whereas neural networks (NN) are used as non-linear forecasting models. It is endeavoured to keep the level of subjectivity in the NN building process to a minimum in an attempt to exploit the full potentials of the NN. It is also investigated whether the historically poor performance of the theoretically superior measure of the monetary services flow, Divisia, relative to the traditional Simple Sum... (More)
Linear models reach their limitations in applications with nonlinearities in the data. In this paper new empirical evidence is provided on the relative Euro inflation forecasting performance of linear and non-linear models. The well established and widely used univariate ARIMA and multivariate VAR models are used as linear forecasting models whereas neural networks (NN) are used as non-linear forecasting models. It is endeavoured to keep the level of subjectivity in the NN building process to a minimum in an attempt to exploit the full potentials of the NN. It is also investigated whether the historically poor performance of the theoretically superior measure of the monetary services flow, Divisia, relative to the traditional Simple Sum measure could be attributed to a certain extent to the evaluation of these indices within a linear framework. Results obtained suggest that non-linear models provide better within-sample and out-of-sample forecasts and linear models are simply a subset of them. The Divisia index also outperforms the Simple Sum index when evaluated in a non-linear framework. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Applied Economics
volume
37
issue
6
pages
665 - 680
publisher
Routledge
external identifiers
  • wos:000228642500005
  • scopus:17744399299
ISSN
1466-4283
DOI
10.1080/0003684052000343679
language
English
LU publication?
yes
id
0f43e243-5e15-48f0-a353-f1d23bb81b40 (old id 896794)
date added to LUP
2008-01-11 11:48:04
date last changed
2017-11-05 03:31:46
@article{0f43e243-5e15-48f0-a353-f1d23bb81b40,
  abstract     = {Linear models reach their limitations in applications with nonlinearities in the data. In this paper new empirical evidence is provided on the relative Euro inflation forecasting performance of linear and non-linear models. The well established and widely used univariate ARIMA and multivariate VAR models are used as linear forecasting models whereas neural networks (NN) are used as non-linear forecasting models. It is endeavoured to keep the level of subjectivity in the NN building process to a minimum in an attempt to exploit the full potentials of the NN. It is also investigated whether the historically poor performance of the theoretically superior measure of the monetary services flow, Divisia, relative to the traditional Simple Sum measure could be attributed to a certain extent to the evaluation of these indices within a linear framework. Results obtained suggest that non-linear models provide better within-sample and out-of-sample forecasts and linear models are simply a subset of them. The Divisia index also outperforms the Simple Sum index when evaluated in a non-linear framework.},
  author       = {Binner, Jane M. and Bissoondeeal, Rakesh K. and Elger, Thomas and Gazely, Alicia M. and Mullineux, Andrew W.},
  issn         = {1466-4283},
  language     = {eng},
  number       = {6},
  pages        = {665--680},
  publisher    = {Routledge},
  series       = {Applied Economics},
  title        = {A comparison of linear forecasting models and neural networks: an application to Euro inflation and Euro Divisia},
  url          = {http://dx.doi.org/10.1080/0003684052000343679},
  volume       = {37},
  year         = {2005},
}