We analyze the discrimination power of well-known model selection criteria when R2 is low as in typical asset return predictability studies. We find that the discrimination power is low in this setup and in particular give another interpretation to the well-cited Bossaerts and Hillion (1999) study. We then look at model selection criteria in a testing framework and propose, as a diagnostic tool, a bootstrap based procedure to construct the class of models which are statistically undistinguishable from the best model chosen by a model selection criterion. As an empirical illustration we reanalyze the Pesaran and Timmerman (1995) results and show that the class of undistiguishable models can be large. Finally we show that the similar problems arise in a more hidden way in the context of recent model uncertainty studies such as the Bayesian model selection criteria proposed by Avramov (2002) and Cremers (2002).
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Length: 25 pages Date of creation: Jun 2004 Date of revision: Handle: RePEc:gen:geneem:2004.05
Contact details of provider: Postal: 40 Boulevard du Pont-d'Arve, CH-1211 Geneva 4, Switzerland Phone: +41 22 379-8200 Fax: +41 22 379-8299 Email: Web page: http://www.unige.ch/ses/metri/
For technical questions regarding this item, or to correct its listing, contact: () The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address..
Related research
Keywords:
This paper has been announced in the following NEP Reports:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
David F. Hendry & Michael P. Clements, 2004.
"Pooling of forecasts,"
Econometrics Journal,
Royal Economic Society, vol. 7(1), pages 1-31, 06.
[Downloadable!] (restricted)
Other versions:
David Hendry & Michael P. Clements, 2001.
"Pooling of Forecasts,"
Economics Papers
2002-W9, Economics Group, Nuffield College, University of Oxford.
[Downloadable!]
Granger, Clive W. J. & Jeon, Yongil, 2004.
"Thick modeling,"
Economic Modelling,
Elsevier, vol. 21(2), pages 323-343, March.
[Downloadable!] (restricted)
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)