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Model Comparisons in Unstable Environments

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  • Raffaella Giacomini
  • Barbara Rossi

Abstract

The goal of this paper is to develop formal techniques for analyzing the relative in-sample performance of two competing, misspeci?ed models in the presence of possible data instability. The central idea of our methodology is to propose a measure of the models? local relative performance: the "local Kullback-Leibler Information Criterion" (KLIC), which measures the relative distance of the two models? (misspeci?ed) likelihoods from the true likelihood at a particular point in time. We discuss estimation and inference about the local relative KLIC; in particular, we propose statistical tests to investigate its stability over time. Compared to previous approaches to model selection, which are based on measures of "global performance", our focus is on the entire time path of the models? relative performance, which may contain useful information that is lost when looking for a globally best model. The empirical application provides insights into the time variation in the performance of a representative DSGE model of the European economy relative to that of VARs. implement IRFMEs.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 09-10.

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Length: 44 Pages
Date of creation: 2009
Date of revision:
Handle: RePEc:duk:dukeec:08-8

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Web page: http://econ.duke.edu/

Related research

Keywords: Model Selection Tests; Misspeci?cation; Structural Change; Kullback-Leibler Information Criterion;

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References

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  1. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  2. Zhongjun Qu & Pierre Perron, 2005. "Estimating and testing structural changes in multivariate regressions," Boston University - Department of Economics - Working Papers Series WP2005-012, Boston University - Department of Economics.
  3. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2005. "Stationarity Tests Under Time-Varying Second Moments," Econometric Theory, Cambridge University Press, vol. 21(06), pages 1112-1129, December.
  4. Rossi, Barbara, 2002. "Optimal Tests for Nested Model Selection with Underlying Parameter Instability," Working Papers 02-05, Duke University, Department of Economics.
  5. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  6. Raffaella Giacomini & Barbara Rossi, 2010. "Forecast comparisons in unstable environments," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 595-620.
  7. Wei Biao Wu & Zhibiao Zhao, 2007. "Inference of trends in time series," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 69(3), pages 391-410.
  8. Douglas Rivers & Quang Vuong, 2002. "Model selection tests for nonlinear dynamic models," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 1-39, June.
  9. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
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Citations

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Cited by:
  1. Leandro M. Magnusson & Sophocles Mavroeidis, 2011. "Identification Using Stability Restrictions," Working Papers 1116, Tulane University, Department of Economics.
  2. Raffaella Giacomini & Barbara Rossi, 2010. "Forecast comparisons in unstable environments," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 595-620.
  3. Inoue, Atsushi & Rossi, Barbara, 2011. "Out-of-Sample Forecast Tests Robust to the Choice of Window Size," CEPR Discussion Papers 8542, C.E.P.R. Discussion Papers.
  4. Barbara Rossi, 2011. "Advances in Forecasting Under Instability," Working Papers 11-20, Duke University, Department of Economics.
  5. Rossi, José Luiz Júnior, 2013. "Liquidity and Exchange Rates," Insper Working Papers wpe_325, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  6. Weber, Enzo & Zika, Gerd, 2013. "Labour market forecasting : is disaggregation useful?," IAB Discussion Paper 201314, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  7. Rossi, José Luiz Júnior, 2014. "The Usefulness of Financial Variables in Predicting Exchange Rate Movements," Insper Working Papers wpe_332, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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