A Likelihood Ratio and Markov Chain Based Method to Evaluate Density Forecasting
AbstractIn this paper, we propose a likelihood ratio and Markov chain based method to evaluate density forecasting. This method can jointly evaluate the unconditional forecasted distribution and dependence of the outcomes. This method is an extension of the widely applied evaluation method for interval forecasting proposed by Christoffersen (1998). It is also a more refined approach than the pure contingency table based density forecasting method in Wallis (2003). We show that our method has very high power against incorrect forecasting distributions and dependence. Moreover, the straightforwardness and ease of application of this joint test provide a high potentiality for further applications in both financial and economical areas.
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Bibliographic InfoPaper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2014/12.
Length: 12 pages
Date of creation: 25 Mar 2014
Date of revision:
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Likelihood ratio test; Markov Chain; Density forecasting;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-11 (All new papers)
- NEP-ECM-2014-04-11 (Econometrics)
- NEP-ETS-2014-04-11 (Econometric Time Series)
- NEP-FOR-2014-04-11 (Forecasting)
- NEP-GER-2014-04-11 (German Papers)
- NEP-ORE-2014-04-11 (Operations Research)
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