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Tests of equal forecast accuracy for overlapping models

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  • Todd Clark
  • Michael W. McCracken

Abstract

This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy when the models being compared are overlapping in the sense of Vuong (1989). Two models are overlapping when the true model contains just a subset of variables common to the larger sets of variables included in the competing forecasting models. We consider an out-of-sample version of the two-step testing procedure recommended by Vuong but also show that an exact one-step procedure is sometimes applicable. When the models are overlapping, we provide a simple-to-use fixed regressor wild bootstrap that can be used to conduct valid inference. Monte Carlo simulations generally support the theoretical results: the two-step procedure is conservative while the one-step procedure can be accurately sized when appropriate. We conclude with an empirical application comparing the predictive content of credit spreads to growth in real stock prices for forecasting U.S. real GDP growth.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1121.

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Date of creation: 2011
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Handle: RePEc:fip:fedcwp:1121

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Keywords: Forecasting;

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  1. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, Elsevier, vol. 140(2), pages 719-752, October.
  2. Antonio Mele, 2009. "Financial Volatility and Economic Activity," FMG Discussion Papers, Financial Markets Group dp642, Financial Markets Group.
  3. Raffaella Giacomini & Halbert White, 2006. "Tests of Conditional Predictive Ability," Econometrica, Econometric Society, Econometric Society, vol. 74(6), pages 1545-1578, November.
  4. Todd E. Clark & Michael W. McCracken, 2000. "Tests of Equal Forecast Accuracy and Encompassing for Nested Models," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0319, Econometric Society.
  5. Robert Rich & Jason Bram & Andrew Haughwout & James Orr & Rae Rosen & Rebecca Sela, 2005. "Using Regional Economic Indexes to Forecast Tax Bases: Evidence from New York," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 627-634, November.
  6. Jon Faust & John H. Rogers & Jonathan H. Wright, 2000. "News and noise in G-7 GDP announcements," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 690, Board of Governors of the Federal Reserve System (U.S.).
  7. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, Econometric Society, vol. 64(5), pages 1067-84, September.
  8. Randi Næs & Johannes A. Skjeltorp & Bernt Arne Ødegard, 2008. "Liquidity and the business cycle," Working Paper, Norges Bank 2008/11, Norges Bank.
  9. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  10. Wright, Jonathan H. & Zhou, Hao, 2009. "Bond risk premia and realized jump risk," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(12), pages 2333-2345, December.
  11. Wegener, Christian & von Nitzsch, Rüdiger & Cengiz, Cetin, 2010. "An advanced perspective on the predictability in hedge fund returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(11), pages 2694-2708, November.
  12. Hansen, Bruce E., 1992. "Convergence to Stochastic Integrals for Dependent Heterogeneous Processes," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 8(04), pages 489-500, December.
  13. 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.
  14. Todd Clark & Michael McCracken, 2005. "Evaluating Direct Multistep Forecasts," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 24(4), pages 369-404.
  15. Corradi, Valentina & Swanson, Norman R. & Olivetti, Claudia, 2001. "Predictive ability with cointegrated variables," Journal of Econometrics, Elsevier, Elsevier, vol. 104(2), pages 315-358, September.
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Cited by:
  1. Brent Meyer & Saeed Zaman, 2013. "It’s not just for inflation: The usefulness of the median CPI in BVAR forecasting," Working Paper 1303, Federal Reserve Bank of Cleveland.

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