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Model Comparisons in Unstable Environments

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  • Barbara Rossi
  • Raffaella Giacomini

Abstract

The goal of this paper is to develop formal techniques for analyzing the relative in-sample performance of two competing, misspecified 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' (misspecified) 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.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-29.

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Length: 45
Date of creation: 2010
Date of revision:
Handle: RePEc:duk:dukeec:10-29

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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: Model Selection Tests; Misspecification; Structural Change; Kullback-Leibler Information Criterion;

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References

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  1. Rossi, Barbara, 2002. "Optimal Tests for Nested Model Selection with Underlying Parameter Instability," Working Papers, Duke University, Department of Economics 02-05, Duke University, Department of Economics.
  2. 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.
  3. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  4. Raffaella Giacomini & Barbara Rossi, 2010. "Forecast comparisons in unstable environments," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(4), pages 595-620.
  5. 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.
  6. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 307-33, March.
  7. Zhongjun Qu & Pierre Perron, 2007. "Estimating and Testing Structural Changes in Multivariate Regressions," Econometrica, Econometric Society, Econometric Society, vol. 75(2), pages 459-502, 03.
  8. 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.
  9. Douglas Rivers & Quang Vuong, 2002. "Model selection tests for nonlinear dynamic models," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 1-39, June.
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Citations

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Cited by:
  1. Barbara Rossi & Atsushi Inoue, 2011. "Out-of-sample forecast tests robust to the choice of window size," Working Papers 11-31, Federal Reserve Bank of Philadelphia.
  2. Barbara Rossi, 2011. "Advances in Forecasting Under Instability," Working Papers, Duke University, Department of Economics 11-20, Duke University, Department of Economics.
  3. Raffaella Giacomini & Barbara Rossi, 2010. "Forecast comparisons in unstable environments," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(4), pages 595-620.
  4. Rossi, José Luiz Júnior, 2014. "The Usefulness of Financial Variables in Predicting Exchange Rate Movements," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_332, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  5. Rossi, José Luiz Júnior, 2013. "Liquidity and Exchange Rates," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_325, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  6. Gürkaynak, Refet S. & Kisacikoglu, Burçin & Rossi, Barbara, 2013. "Do DSGE Models Forecast More Accurately Out-of-Sample than VAR Models?," CEPR Discussion Papers 9576, C.E.P.R. Discussion Papers.
  7. 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].
  8. Leandro M. Magnusson & Sophocles Mavroeidis, 2011. "Identification Using Stability Restrictions," Working Papers, Tulane University, Department of Economics 1116, Tulane University, Department of Economics.

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