Forecasting Question
Posted: Mon Oct 05, 2009 10:38 am
by brennan6738
Is there any rule of thumb as to the relationship between how many periods a model can forecast out and how many orders (or lags) the model has? For example, if I am using a VAR(20) can I only extrapolate out 10 observations or am I able to forecast more than 20 periods ahead?
Re: Forecasting Question
Posted: Wed Oct 07, 2009 1:17 am
by trubador
Depends on the choice between static and dynamic forecasts. If you prefer static forecast, then your forecast horizon is limited to one step ahead no matter what your lag structure is. However, there is no such restriction for dynamic forecast, since it treats the previous estimate as a realized value. You should be careful about the lag length in multivariate analyses like VAR, since the model can quickly run out of degrees of freedom.