Model confidence sets and forecast combination: an application to age-specific mortality.

Background: Model averaging combines forecasts obtained from a range of models, and it often produces more accurate forecasts than a forecast from a single model.

Objective: The crucial part of forecast accuracy improvement in using the model averaging lies in the determination of optimal weights from a finite sample. If the weights are selected sub-optimally, this can affect the accuracy of the model-averaged forecasts. Instead of choosing the optimal weights, we consider trimming a set of models before equally averaging forecasts from the selected superior models. Motivated by Hansen et al. (Econometrica 79(2):453-497, 2011), we apply and evaluate the model confidence set procedure when combining mortality forecasts.

Data And Methods: The proposed model averaging procedure is motivated by Samuels and Sekkel (International Journal of Forecasting 33(1):48-60, 2017) based on the concept of model confidence sets as proposed by Hansen et al. (Econometrica 79(2):453-497, 2011) that incorporates the statistical significance of the forecasting performance. As the model confidence level increases, the set of superior models generally decreases. The proposed model averaging procedure is demonstrated via national and sub-national Japanese mortality for retirement ages between 60 and 100+.

Results: Illustrated by national and sub-national Japanese mortality for ages between 60 and 100+, the proposed model-averaged procedure gives the smallest interval forecast errors, especially for males.

Conclusion: We find that robust out-of-sample point and interval forecasts may be obtained from the trimming method. By robust, we mean robustness against model misspecification.