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Conditional predictive density evaluation in the presence of instabilities

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  • Barbara Rossi

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  • Tatevik Sekhposyan

Abstract

We propose new methods for evaluating predictive densities. The methods include Kolmogorov-Smirnov and Cramér-von Mises-type tests for the correct specification of predictive densities robust to dynamic mis-specification. The novelty is that the tests can detect mis-specification in the predictive densities even if it appears only over a fraction of the sample, due to the presence of instabilities. Our results indicate that our tests are well sized and have good power in detecting mis-specification in predictive densities, even when it is time-varying. An application to density forecasts of the Survey of Professional Forecasters demonstrates the usefulness of the proposed methodologies.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1368.

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Date of creation: Feb 2013
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Handle: RePEc:upf:upfgen:1368

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Predictive Density; Dynamic Mis-specification; Instability; Structural Change; Forecast Evaluation.;

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  1. Valentina Corradi & Norman R. Swanson, 2003. "Bootstrap Conditional Distribution Tests In the Presence of Dynamic Misspecification," Departmental Working Papers, Rutgers University, Department of Economics 200311, Rutgers University, Department of Economics.
  2. Kenneth D. West, 1994. "Asymptotic Inference About Predictive Ability," Macroeconomics, EconWPA 9410002, EconWPA.
  3. Rossi, Barbara, 2005. "Optimal Tests For Nested Model Selection With Underlying Parameter Instability," Econometric Theory, Cambridge University Press, vol. 21(05), pages 962-990, October.
  4. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(4), pages 1163-1212, May.
  5. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  6. van Dijk, D.J.C. & Franses, Ph.H.B.F., 2003. "Selecting a Nonlinear Time Series Model using Weighted Tests of Equal Forecast Accuracy," Econometric Institute Research Papers EI 2003-10, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  7. Andrade, P. & Ghysels, E. & Idier, J., 2012. "Tails of Inflation Forecasts and Tales of Monetary Policy," Working papers, Banque de France 407, Banque de France.
  8. Valentina Corradi & Norman Swanson, 2006. "Predictive Density Evaluation. Revised," Departmental Working Papers, Rutgers University, Department of Economics 200621, Rutgers University, Department of Economics.
  9. Jushan Bai, 2003. "Testing Parametric Conditional Distributions of Dynamic Models," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 531-549, August.
  10. Valentina Corradi & Norman R. Swanson, 2003. "Evaluation of Dynamic Stochastic General Equilibrium Models Based on Distributional Comparison of Simulated and Historical Data," Departmental Working Papers, Rutgers University, Department of Economics 200320, Rutgers University, Department of Economics.
  11. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  12. Corradi, Valentina & Swanson, Norman R., 2006. "Predictive Density Evaluation," Handbook of Economic Forecasting, Elsevier, Elsevier.
  13. Cees Diks & Valentyn Panchenko & Dick van Dijk, 2011. "Likelihood-based scoring rules for comparing density forecasts in tails," Post-Print peer-00834423, HAL.
  14. Inoue, Atsushi, 2001. "Testing For Distributional Change In Time Series," Econometric Theory, Cambridge University Press, vol. 17(01), pages 156-187, February.
  15. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  16. Amisano, Gianni & Giacomini, Raffaella, 2007. "Comparing Density Forecasts via Weighted Likelihood Ratio Tests," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 177-190, April.
  17. Valentina Corradi & Norman Swanson, 2004. "Predective Density and Conditional Confidence Interval Accuracy Tests," Departmental Working Papers, Rutgers University, Department of Economics 200423, Rutgers University, Department of Economics.
  18. Yongmiao Hong, 2005. "Nonparametric Specification Testing for Continuous-Time Models with Applications to Term Structure of Interest Rates," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 37-84.
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Cited by:
  1. Barbara Rossi, 2013. "Exchange rate predictability," Economics Working Papers 1369, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Barbara Rossi & Tatevik Sehkposyan, 2013. "Evaluating Predictive Densities of US Output Growth and Inflation in a Large Macroeconomic Data Set," Working Papers 689, Barcelona Graduate School of Economics.

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