An empirical study of seasonal unit roots in forecasting

We assess the usefulness of pre-testing for seasonal roots, based on the Hylleberg et al. (1990) (HEGY) approach, for out-of-sample forecasting. It is shown that if there are shifts in the deterministic seasonal components then the imposition of unit roots can partially robustify sequences of rolling forecasts, yielding improved forecast accuracy. The analysis is illustrated with two empirical examples where more accurate forecasts are obtained by imposing more roots than is warranted by HEGY. The issue of assessing forecast accuracy when predictions of any one of a number of linear transformations may be of interest is also addressed.