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Testing Predictive Ability and Power Robustification

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  • Kyungchul Song

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    (Department of Economics, University of Pennsylvania)

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    Abstract

    One of the approaches to compare forecasts is to test whether the loss from a benchmark prediction is smaller than the others. The test can be embedded into the general problem of testing functional inequalities using a one-sided Kolmogorov-Smirnov functional. This paper shows that such a test generally suffers from unstable power properties, meaning that the asymptotic power against certain local alternatives can be much smaller than the size. This paper proposes a general method to robustify the power properties. This method can also be applied to testing inequalities such as stochastic dominance and moment inequalities. Simulation studies demonstrate that tests based on this paper’s approach perform quite well relative to the existing methods.

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    File URL: http://economics.sas.upenn.edu/system/files/working-papers/09-035.pdf
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    Bibliographic Info

    Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 09-035.

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    Length: 30 pages
    Date of creation: 05 Oct 2009
    Date of revision:
    Handle: RePEc:pen:papers:09-035

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    Keywords: Inequality Restrictions; Testing Predictive Ability; One-sided Nonparametric Tests; Power Robustification;

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    1. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
    2. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
    3. Victor Chernozhukov & Han Hong & Elie Tamer, 2007. "Estimation and Confidence Regions for Parameter Sets in Econometric Models," Econometrica, Econometric Society, vol. 75(5), pages 1243-1284, 09.
    4. Adam Rosen, 2006. "Confidence sets for partially identified parameters that satisfy a finite number of moment inequalities," CeMMAP working papers CWP25/06, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    5. John Cawley & Tomas Philipson, 1996. "An Empirical Examination of Information Barriers to Trade in Insurance," NBER Working Papers 5669, National Bureau of Economic Research, Inc.
    6. Fan, Yanqin & Park, Sang Soo, 2010. "Confidence sets for some partially identified parameters," MPRA Paper 37149, University Library of Munich, Germany.
    7. West, K.D., 1994. "Asymptotic Inference About Predictive Ability," Working papers 9417, Wisconsin Madison - Social Systems.
    8. Oliver Linton & Kyungchul Song & Yoon-Jae Whang, 2009. "An improved bootstrap test of stochastic dominance," Economics Working Papers we094827, Universidad Carlos III, Departamento de Economía.
    9. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
    10. Raffaella Giacomini & Halbert White, 2006. "Tests of Conditional Predictive Ability," Econometrica, Econometric Society, vol. 74(6), pages 1545-1578, November.
    11. Gianni Amisano & Raffaella Giacomini, 2005. "Comparing Density Forecsts via Weighted Likelihood Ratio Tests," Working Papers ubs0504, University of Brescia, Department of Economics.
    12. Donald W. K. Andrews & Gustavo Soares, 2010. "Inference for Parameters Defined by Moment Inequalities Using Generalized Moment Selection," Econometrica, Econometric Society, vol. 78(1), pages 119-157, 01.
    13. Garry F. Barrett & Stephen G. Donald, 2003. "Consistent Tests for Stochastic Dominance," Econometrica, Econometric Society, vol. 71(1), pages 71-104, January.
    14. Michel Denuit, 2004. "Nonparametric Tests for Positive Quadrant Dependence," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(3), pages 422-450.
    15. Tae-Hwy Lee & Yong Bao & Burak Saltoğlu, 2007. "Comparing density forecast models Previous versions of this paper have been circulated with the title, 'A Test for Density Forecast Comparison with Applications to Risk Management' since October 2003;," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 26(3), pages 203-225.
    16. Russell Davidson & Jean-Yves Duclos, 2000. "Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality," Econometrica, Econometric Society, vol. 68(6), pages 1435-1464, November.
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