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Regression-Based Tests of Predictive Ability

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  • West, Kenneth D
  • McCracken, Michael W

Abstract

The authors develop regression-based tests of hypotheses about out of sample prediction errors. Representative tests include ones for zero mean and zero correlation between a prediction error and a vector of predictors. The relevant environments are ones in which predictions depend on estimated parameters. The authors show that standard regression statistics generally fail to account for errors introduced by estimation of these parameters. They propose computationally convenient test statistics that properly account for such errors. Simulations indicate that the procedures can work well in samples of size typically available, although there sometimes are substantial size distortions. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 39 (1998)
Issue (Month): 4 (November)
Pages: 817-40

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Handle: RePEc:ier:iecrev:v:39:y:1998:i:4:p:817-40

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References

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  1. West, K.D., 1994. "Asymptotic Inference About Predictive Ability," Working papers 9417, Wisconsin Madison - Social Systems.
  2. Davidson, Russell & MacKinnon, James G, 1984. "Model Specification Tests Based on Artificial Linear Regressions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(2), pages 485-502, June.
  3. Diebold, Francis X. & Nason, James A., 1990. "Nonparametric exchange rate prediction?," Journal of International Economics, Elsevier, vol. 28(3-4), pages 315-332, May.
  4. Chong, Yock Y & Hendry, David F, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 671-90, August.
  5. Adrian R. Pagan & G. William Schwert, 1990. "Alternative Models For Conditional Stock Volatility," NBER Working Papers 2955, National Bureau of Economic Research, Inc.
  6. Berger, Allen N & Krane, Spencer D, 1985. "The Information Efficiency of Econometric Model Forecasts," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 128-34, February.
  7. Todd E. Clark, 1996. "Finite-sample properties of tests for forecast equivalence," Research Working Paper 96-03, Federal Reserve Bank of Kansas City.
  8. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  10. Hoffman, Dennis L & Pagan, Adrian R, 1989. "Post-Sample Prediction Tests for Generalized Method of Moments Estimators," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(3), pages 333-43, August.
  11. Howrey, E Philip & Klein, Lawrence R & McCarthy, Michael D, 1974. "Notes on Testing the Predictive Performance of Econometric Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(2), pages 366-83, June.
  12. repec:cup:etheor:v:6:y:1990:i:1:p:17-43 is not listed on IDEAS
  13. Kenneth D. West & Whitney K. Newey, 1995. "Automatic Lag Selection in Covariance Matrix Estimation," NBER Technical Working Papers 0144, National Bureau of Economic Research, Inc.
  14. West, K.D. & Cho, D., 1993. "The Predictive Ability of Several Models of Exchange Rate Volatility," Working papers 9317, Wisconsin Madison - Social Systems.
  15. Jacob A. Mincer & Victor Zarnowitz, 1969. "The Evaluation of Economic Forecasts," NBER Chapters, in: Economic Forecasts and Expectations: Analysis of Forecasting Behavior and Performance, pages 1-46 National Bureau of Economic Research, Inc.
  16. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-89, June.
  17. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May.
  18. West, Kenneth D & Wilcox, David W, 1996. "A Comparison of Alternative Instrumental Variables Estimators of a Dynamic Linear Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 281-93, July.
  19. Wooldridge, Jeffrey M., 1990. "A Unified Approach to Robust, Regression-Based Specification Tests," Econometric Theory, Cambridge University Press, vol. 6(01), pages 17-43, March.
  20. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  21. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-67, July.
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