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Conditional Predictive Density Evaluation in the Presence of Instabilities

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  • Barbara Rossi
  • Tatevik Sehkposyan

Abstract

We propose new methods for evaluating predictive densities. The methods include Kolmogorov-Smirnov and Cramer-von Mises-type tests for the correct specification of predictive densities robust to dynamic mis-specification. The novelty is that the tests can detect mis-specification in the predictive densities even if it appears only over a fraction of the sample, due to the presence of instabilities. Our results indicate that our tests are well sized and have good power in detecting mis-specification in predictive densities, even when it is time-varying. An application to density forecasts of the Survey of Professional Forecasters demonstrates the usefulness of the proposed methodologies.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 688.

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Date of creation: Feb 2013
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Handle: RePEc:bge:wpaper:688

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Keywords: predictive density; dynamic mis-specification; instability; structural change; forecast evaluation;

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  1. van Dijk, D.J.C. & Franses, Ph.H.B.F., 2003. "Selecting a Nonlinear Time Series Model using Weighted Tests of Equal Forecast Accuracy," Econometric Institute Research Papers EI 2003-10, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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Cited by:
  1. Rossi, Barbara, 2013. "Exchange Rate Predictability," CEPR Discussion Papers 9575, C.E.P.R. Discussion Papers.
  2. Barbara Rossi & Tatevik Sekhposyan, 2013. "Evaluating predictive densities of U.S. output growth and inflation in a large macroeconomic data set," Economics Working Papers 1370, Department of Economics and Business, Universitat Pompeu Fabra.

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