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Testing directional forecast value in the presence of serial correlation

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Author Info
Oliver Blaskowitz
Helmut Herwartz

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Abstract

Common approaches to test for the economic value of directional forecasts are based on the classical Chi-square test for independence, Fisher’s exact test or the Pesaran and Timmerman (1992) test for market timing. These tests are asymptotically valid for serially independent observations. Yet, in the presence of serial correlation they are markedly oversized as confirmed in a simulation study. We summarize serial correlation robust test procedures and propose a bootstrap approach. By means of a Monte Carlo study we illustrate the relative merits of the latter. Two empirical applications demonstrate the relevance to account for serial correlation in economic time series when testing for the value of directional forecasts.

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Publisher Info
Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-073.

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Length: 37 pages
Date of creation: Dec 2008
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Handle: RePEc:hum:wpaper:sfb649dp2008-073

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Related research
Keywords: Directional forecasts; directional accuracy; forecast evaluation; testing independence; contingency tables; bootstrap;

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting

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