Forecast combination and encompassing: Reconciling two divergent literatures

The relationship of forecast combination to recent developments in the theory and practice of model selection (in particular, the encompassing literature) is explored, the pragmatic virtues of forecast combination are argued, and a synthesis is attempted. Promising areas for future research, particularly exploration and development of forecast combination methodologies that facilitate ‘shrinkage’ of estimated combining weights toward a measure of central tendency, are also discussed.