Optimal prediction pools

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Journal Article
Journal of Econometrics, 2011, 164 (1), pp. 130 - 141
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We consider the properties of weighted linear combinations of prediction models, or linear pools, evaluated using the log predictive scoring rule. Although exactly one model has limiting posterior probability, an optimal linear combination typically includes several models with positive weights. We derive several interesting results: for example, a model with positive weight in a pool may have zero weight if some other models are deleted from that pool. The results are illustrated using S&P 500 returns with six prediction models. In this example models that are clearly inferior by the usual scoring criteria have positive weights in optimal linear pools. © 2011 Elsevier B.V. All rights reserved.
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