Gcr. Kemp, The behavior of forecast errors from a nearly integrated Ar(1) model as both sample size and forecast horizon become large, ECONOMET TH, 15(2), 1999, pp. 238-256
We develop asymptotic approximations to the distribution of forecast errors
from an estimated AR(1) model with no drift when the true process is nearl
y 1(1) and both the forecast horizon and the sample size are allowed to inc
rease at the same rate, We find that the forecast errors are the sums of tw
o components that are asymptotically independent. The first is asymptotical
ly normal whereas the second is asymptotically nonnormal. This throws doubt
on the suitability of a normal approximation to the forecast error distrib
ution. We then perform a Monte Carlo study to quantify further the effects
on the forecast errors of sampling variability in the parameter estimates a
s we allow both forecast horizon and sample size to increase.