A Recursive Kalman Filter Forecasting Approach

This paper examines the forecasting accuracy and the cost effectiveness of time series models with time-varying coefficients. A simulation study investigates the potential forecasting benefits of a proposed Kalman filter type adaptive estimation and forecasting approach. It is found that:

1. When appropriate, the time-varying coefficient approach leads to better forecasts than the constant coefficient procedures.

2. A simple decision rule, which indicates whether time-varying coefficient models are in fact needed, increases the computational efficiency.