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Alternative Tests for Correct Specification of Conditional Predictive Densities

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  • Barbara Rossi
  • Tatevik Sekhposyan

Abstract

We propose new methods for evaluating predictive densities that focus on the models’ actual predictive ability in finite samples. The tests offer a simple way of evaluating the correct specification of predictive densities, either parametric or non-parametric. The results indicate that our tests are well sized and have good power in detecting mis-specification in predictive densities. An empirical application to the Survey of Professional Forecasters and a baseline Dynamic Stochastic General Equilibrium model shows the usefulness of our methodology.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 758.

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Date of creation: Jan 2014
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Handle: RePEc:bge:wpaper:758

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Keywords: predictive density; dynamic mis-specification; forecast evaluation;

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  1. Gianni Amisano & Raffaella Giacomini, 2005. "Comparing Density Forecsts via Weighted Likelihood Ratio Tests," Working Papers, University of Brescia, Department of Economics ubs0504, University of Brescia, Department of Economics.
  2. Yongmiao Hong, 2005. "Nonparametric Specification Testing for Continuous-Time Models with Applications to Term Structure of Interest Rates," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(1), pages 37-84.
  3. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 19(4), pages 465-74, October.
  4. Inoue, Atsushi, 2001. "Testing For Distributional Change In Time Series," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 17(01), pages 156-187, February.
  5. N. Meddahi & C. Bontemps, 2004. "Testing Distributional Assumptions: A GMM Approach," Econometric Society 2004 North American Winter Meetings, Econometric Society 487, Econometric Society.
  6. Wolters, Maik Hendrik, 2012. "Evaluating point and density forecasts of DSGE models," IMFS Working Paper Series, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt 59, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  7. Valentina Corradi & Norman R. Swanson, 2003. "Evaluation of Dynamic Stochastic General Equilibrium Models Based on Distributional Comparison of Simulated and Historical Data," Departmental Working Papers, Rutgers University, Department of Economics 200320, Rutgers University, Department of Economics.
  8. Jushan Bai & Serena Ng, 2001. "Tests for Skewness, Kurtosis, and Normality for Time Series Data," Boston College Working Papers in Economics, Boston College Department of Economics 501, Boston College Department of Economics.
  9. Hong, Yongmiao & Li, Haitao & Zhao, Feng, 2007. "Can the random walk model be beaten in out-of-sample density forecasts? Evidence from intraday foreign exchange rates," Journal of Econometrics, Elsevier, Elsevier, vol. 141(2), pages 736-776, December.
  10. Gneiting, Tilmann & Raftery, Adrian E., 2007. "Strictly Proper Scoring Rules, Prediction, and Estimation," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 102, pages 359-378, March.
  11. 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, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute EI 2003-10, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  12. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  13. Wolters, Maik H., 2011. "Forecasting under Model Uncertainty," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis, Verein für Socialpolitik / German Economic Association 48723, Verein für Socialpolitik / German Economic Association.
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