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Forecast comparisons in unstable environments

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  • Raffaella Giacomini

    (UCL|CEMMAP and Department of Economics, Duke University, Durham, NC, USA)

  • Barbara Rossi

    (UCL|CEMMAP and Department of Economics, Duke University, Durham, NC, USA)

Abstract

We propose new methods for comparing the out-of-sample forecasting performance of two competing models in the presence of possible instabilities. The main idea is to develop a measure of the relative local forecasting performance for the two models, and to investigate its stability over time by means of statistical tests. We propose two tests (the Fluctuation test and the One-Time Reversal test) that analyze the evolution of the models' relative performance over historical samples. In contrast to previous approaches to forecast comparison, which are based on measures of global performance, we focus on the entire time path of the models' relative performance, which may contain useful information that is lost when looking for the model that forecasts best on average. We apply our tests to the analysis of the time variation in the out-of-sample forecasting performance of monetary models of exchange rate determination relative to the random walk. Copyright © 2010 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 25 (2010)
Issue (Month): 4 ()
Pages: 595-620

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Handle: RePEc:jae:japmet:v:25:y:2010:i:4:p:595-620

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  1. Kenneth D. West, 1994. "Asymptotic Inference About Predictive Ability," Macroeconomics 9410002, EconWPA.
  2. 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.
  3. Raffaella Giacomini & Barbara Rossi, 2012. "Model comparisons in unstable environments," CeMMAP working papers CWP13/12, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  4. Inoue, Atsushi & Kilian, Lutz, 2003. "On the Selection of Forecasting Models," CEPR Discussion Papers 3809, C.E.P.R. Discussion Papers.
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  17. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc.
  18. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
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