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In-Sample or Out-of-Sample Tests of Predictability: Which One Should We Use?

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  • Inoue, Atsushi
  • Kilian, Lutz

Abstract

It is widely known that significant in-sample evidence of predictability does not guarantee significant out-of-sample predictability. This is often interpreted as an indication that in-sample evidence is likely to be spurious and should be discounted. In this Paper we question this conventional wisdom. Our analysis shows that neither data mining nor parameter instability is a plausible explanation of the observed tendency of in-sample tests to reject the no predictability null more often than out-of-sample tests. We provide an alternative explanation based on the higher power of in-sample tests of predictability. We conclude that results of in-sample tests of predictability will typically be more credible than results of out-of-sample tests.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3671.

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Date of creation: Dec 2002
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Handle: RePEc:cpr:ceprdp:3671

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Keywords: data mining; parameter instability; predictability test; reliability of inference;

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