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Forecast Comparisons in Unstable Environments

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  • Giacomini, Raffaella
  • Rossi, Barbara

Abstract

We propose new methods for comparing the relative 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 ìlocal forecasting performanceî for the two models, and to investigate its stability over time by means of statistical tests. We propose two tests (the ìFluctuation testî and the test against a ìOne-time Reversalî) that analyze the evolution of the modelsí relative performance over historical samples. In contrast to previous approaches to forecast comparison, which are based on measures of ìglobal performanceî, we focus on the entire time path of the modelsí 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.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 08-04.

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Length: 30 Pages
Date of creation: 2008
Date of revision:
Handle: RePEc:duk:dukeec:08-4

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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

Related research

Keywords: Predictive Ability Testing; Instability; Structural Change; Forecast Evaluation;

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References

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  1. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  3. Rossi, Barbara, 2005. "Optimal Tests For Nested Model Selection With Underlying Parameter Instability," Econometric Theory, Cambridge University Press, vol. 21(05), pages 962-990, October.
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  8. Barbara Rossi & Raffaella Giacomini, 2010. "Model Comparisons in Unstable Environments," Working Papers 10-29, Duke University, Department of Economics.
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  15. Mc Cracken, Michael W., 2000. "Robust out-of-sample inference," Journal of Econometrics, Elsevier, vol. 99(2), pages 195-223, December.
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  17. Elliott, Graham & Timmermann, Allan G, 2004. "Optimal Forecast Combination Under Regime Switching," CEPR Discussion Papers 4649, C.E.P.R. Discussion Papers.
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