Cointegration versus least squares regression

Abstract Least squares regression models that explain international tourism demand have been shown to generate less accurate forecasts than the naive “no change” model. This study investigates if the reason for such mediocre forecasting performance is the failure to adopt recent developments in econometric methods in the areas of cointegration, error correction models, and diagnostic checking. The empirical results demonstrate that the forecasts produced using these recent methodological developments are more accurate than those generated by least squares regression, but that these newer econometric models still fail to outperform the “no change” model, as well as statistical time series models.

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