THE EFFECT OF PARAMETER UNCERTAINTY ON FORECAST VARIANCES AND CONFIDENCE-INTERVALS FOR UNIT-ROOT AND TREND STATIONARY TIME-SERIES MODELS

In this paper I describe the effect of parameter uncertainty on the way conditional forecast variances grow as the forecast horizon increases. Without parameter uncertainty, forecast variances for the unit root model grow linearly with the forecast horizon while with the trend stationary model they are bounded. With parameter uncertainty, however, I find that for both the unit root and the trend stationary models, forecast variances grow with the square of the forecast horizon so that uncertainty grows at a much faster rate than without parameter uncertainty. Copyright © 1991 John Wiley & Sons, Ltd.