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Understanding models' forecasting performance

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  • Rossi, Barbara
  • Sekhposyan, Tatevik

Abstract

We propose a new methodology to identify the sources of models' forecasting performance. The methodology decomposes the models' forecasting performance into asymptotically uncorrelated components that measure instabilities in the forecasting performance, predictive content, and over-fitting. The empirical application shows the usefulness of the new methodology for understanding the causes of the poor forecasting ability of economic models for exchange rate determination.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 164 (2011)
Issue (Month): 1 (September)
Pages: 158-172

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Handle: RePEc:eee:econom:v:164:y:2011:i:1:p:158-172

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Web page: http://www.elsevier.com/locate/jeconom

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Keywords: Forecasting Forecast evaluation Instabilities Over-fitting Exchange rates;

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References

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  1. Charles Engel & Nelson C. Mark & Kenneth D. West, 2007. "Exchange Rate Models Are Not as Bad as You Think," NBER Working Papers 13318, National Bureau of Economic Research, Inc.
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  3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  4. Todd E. Clark & Michael W. McCracken, 2000. "Tests of Equal Forecast Accuracy and Encompassing for Nested Models," Econometric Society World Congress 2000 Contributed Papers 0319, Econometric Society.
  5. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  6. Richard Meese & Kenneth Rogoff, 1983. "The Out-of-Sample Failure of Empirical Exchange Rate Models: Sampling Error or Misspecification?," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 67-112 National Bureau of Economic Research, Inc.
  7. Raffaella Giacomini & Barbara Rossi, 2010. "Forecast comparisons in unstable environments," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 595-620.
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  9. West, Kenneth D & McCracken, Michael W, 1998. "Regression-Based Tests of Predictive Ability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 817-40, November.
  10. Michael W. McCracken & Todd E. Clark, 2003. "The Predictive Content of the Output Gap for Inflation: Resolving In-Sample and Out-of-Sample Evidence," Computing in Economics and Finance 2003 183, Society for Computational Economics.
  11. Philippe Bacchetta & Eric van Wincoop & Toni Beutler, 2009. "Can Parameter Instability Explain the Meese-Rogoff Puzzle?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 09.08, Université de Lausanne, Faculté des HEC, DEEP.
  12. Kenneth D. West, 1994. "Asymptotic Inference About Predictive Ability," Macroeconomics 9410002, EconWPA.
  13. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
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  17. Rossi, Barbara & Giacomini, Raffaella, 2006. "Detecting and Predicting Forecast Breakdowns," Working Papers 06-01, Duke University, Department of Economics.
  18. Giacomini, Raffaella & White, Halbert, 2003. "Tests of Conditional Predictive Ability," University of California at San Diego, Economics Working Paper Series qt5jk0j5jh, Department of Economics, UC San Diego.
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Citations

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Cited by:
  1. Robert Lehmann & Antje Weyh, 2014. "Forecasting employment in Europe: Are survey results helpful?," Ifo Working Paper Series Ifo Working Paper No. 182, Ifo Institute for Economic Research at the University of Munich.
  2. Barbara Rossi, 2013. "Exchange Rate Predictability," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1063-1119, December.
  3. Barbara Rossi, 2011. "Advances in Forecasting Under Instability," Working Papers 11-20, Duke University, Department of Economics.
  4. Barbara Rossi & Atsushi Inoue, 2011. "Out-of-sample forecast tests robust to the choice of window size," Working Papers 11-31, Federal Reserve Bank of Philadelphia.

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