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Business Analytics

Practical Use of Sensitivity in Econometrics with an Illustration for Forecast Combinations

Dr Andrey Vasnev, University of Sydney Business School

16th Mar 2012  11:00 am - Room 498, Merewether Building (H04)

Jan R. Magnus and Andrey L. Vasnev

We consider practical use of the sensitivity measure studied by Magnus and Vasnev (2007). For this purpose we distinguish between absolute and relative sensitivity
and highlight the context dependent nature of the sensitivity analysis. Relative sensitivity is then applied in the context of forecast combination and sensitivity based
weights are introduced. All concepts are illustrated with the help of the European
yield curve example. In this context it is natural to look at sensitivity to autocorrelation
and normality assumptions. Different forecasting models are combined with equal, fit based and sensitivity based weights and compared against the multivariate and random walk benchmarks. We show that the fit based weights and the sensitivity based weights are complimentary.