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Bias Correction and Out-of-Sample Forecast Accuracy

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Author Info
Kim, Hyeongwoo
Durmaz, Nazif

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Abstract

The least squares (LS) estimator suffers from signi cant downward bias in autoregressive models that include an intercept. By construction, the LS estimator yields the best in-sample fit among a class of linear estimators notwithstanding its bias. Then, why do we need to correct for the bias? To answer this question, we evaluate the usefulness of the two popular bias correction methods, proposed by Hansen (1999) and So and Shin (1999), by comparing their out-of-sample forecast performances with that of the LS estimator. We find that bias-corrected estimators overall outperform the LS estimator. Especially, Hansen's grid bootstrap estimator combined with a rolling window method performs the best.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16780.

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Date of creation: May 2009
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Handle: RePEc:pra:mprapa:16780

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Related research
Keywords: Small-Sample Bias; Grid Bootstrap; Recursive Mean Adjustment; Out-of-Sample Forecast; Diebold-Mariano Test;

Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications

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  6. Murray, Christian J. & Papell, David H., 2002. "The purchasing power parity persistence paradigm," Journal of International Economics, Elsevier, vol. 56(1), pages 1-19, January. [Downloadable!] (restricted)
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  7. Andrews, Donald W K, 1993. "Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models," Econometrica, Econometric Society, vol. 61(1), pages 139-65, January. [Downloadable!] (restricted)
  8. Donggyu Sul & Peter C. B. Phillips & Chi-Young Choi, 2005. "Prewhitening Bias in HAC Estimation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(4), pages 517-546, 08. [Downloadable!] (restricted)
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  9. Karanasos, M. & Sekioua, S.H. & Zeng, N., 2006. "On the order of integration of monthly US ex-ante and ex-post real interest rates: New evidence from over a century of data," Economics Letters, Elsevier, vol. 90(2), pages 163-169, February. [Downloadable!] (restricted)
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  12. Taylor, A M Robert, 2002. "Regression-Based Unit Root Tests with Recursive Mean Adjustment for Seasonal and Nonseasonal Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 269-81, April.
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