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Tests of Equal Predictive Ability With Real-Time Data

  • Clark, Todd E.
  • McCracken, Michael W.

This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy applied to direct, multi-step predictions from both non-nested and nested linear regression models. In contrast to earlier work -- including West (1996), Clark and McCracken (2001, 2005),and McCracken (2006) -- our asymptotics take account of the real-time, revised nature of the data. Monte Carlo simulations indicate that our asymptotic approximations yield reasonable size and power properties in most circumstances. The paper concludes with an examination of the real-time predictive content of various measures of economic activity for inflation.

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File URL: http://pubs.amstat.org/doi/abs/10.1198/jbes.2009.07204
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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 27 (2009)
Issue (Month): 4 ()
Pages: 441-454

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Handle: RePEc:bes:jnlbes:v:27:i:4:y:2009:p:441-454
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  1. Dean Croushore & Tom Stark, 1999. "A real-time data set for marcoeconomists: does the data vintage matter?," Working Papers 99-21, Federal Reserve Bank of Philadelphia.
  2. Clark, Todd E. & McCracken, Michael W., 2001. "Tests of equal forecast accuracy and encompassing for nested models," Journal of Econometrics, Elsevier, vol. 105(1), pages 85-110, November.
  3. James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  4. Raffella Giacomini & Barbara Rossi, 2005. "Detecting and Predicting Forecast Breakdowns," UCLA Economics Working Papers 845, UCLA Department of Economics.
  5. Evan F. Koenig & Sheila Dolmas & Jeremy Piger, 2000. "The use and abuse of "real-time" data in economic forecasting," International Finance Discussion Papers 684, Board of Governors of the Federal Reserve System (U.S.).
  6. Tom Stark & Dean Croushore, 2001. "Forecasting with a real-time data set for macroeconomists," Working Papers 01-10, Federal Reserve Bank of Philadelphia.
  7. Swanson, N.R., 1996. "Forecasting Using First Available Versus Fully Revised Economic Time Series data," Papers 4-96-7, Pennsylvania State - Department of Economics.
  8. West, Kenneth D & McCracken, Michael W, 1998. "Regression-Based Tests of Predictive Ability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 817-40, November.
  9. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  10. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  11. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-84, September.
  12. Clark, Todd E. & McCracken, Michael W., 2009. "Tests of Equal Predictive Ability With Real-Time Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 441-454.
  13. John C. Robertson & Ellis W. Tallman, 1998. "Data vintages and measuring forecast model performance," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 4-20.
  14. Athanasios Orphanides & Simon van Norden, 2003. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CIRANO Working Papers 2003s-01, CIRANO.
  15. Raffaella Giacomini & Halbert White, 2003. "Tests of Conditional Predictive Ability," Econometrics 0308001, EconWPA.
  16. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  17. Croushore, Dean, 2006. "Forecasting with Real-Time Macroeconomic Data," Handbook of Economic Forecasting, Elsevier.
  18. Aruoba, Boragan, 2005. "Data Revisions Are Not Well-Behaved," CEPR Discussion Papers 5271, C.E.P.R. Discussion Papers.
  19. Corradi, Valentina & Swanson, Norman R. & Olivetti, Claudia, 2001. "Predictive ability with cointegrated variables," Journal of Econometrics, Elsevier, vol. 104(2), pages 315-358, September.
  20. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
  21. Corradi, V. & Swanson, N.R., 2000. "A Consistent Test for Nonlinear Out of Sample Predictive Accuracy," Discussion Papers 0012, Exeter University, Department of Economics.
  22. Mc Cracken, Michael W., 2000. "Robust out-of-sample inference," Journal of Econometrics, Elsevier, vol. 99(2), pages 195-223, December.
  23. Clark, Todd E. & McCracken, Michael W., 2006. "The Predictive Content of the Output Gap for Inflation: Resolving In-Sample and Out-of-Sample Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1127-1148, August.
  24. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  25. Chao, John & Corradi, Valentina & Swanson, Norman R., 2001. "Out-Of-Sample Tests For Granger Causality," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 598-620, September.
  26. Jon Faust & John H. Rogers & Jonathan H. Wright, 2000. "News and noise in G-7 GDP announcements," International Finance Discussion Papers 690, Board of Governors of the Federal Reserve System (U.S.).
  27. Howrey, E Philip, 1978. "The Use of Preliminary Data in Econometric Forecasting," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 193-200, May.
  28. Barbara Rossi, 2005. "Testing Long-Horizon Predictive Ability With High Persistence, And The Meese-Rogoff Puzzle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 61-92, 02.
  29. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October.
  30. Todd Clark & Michael McCracken, 2005. "Evaluating Direct Multistep Forecasts," Econometric Reviews, Taylor & Francis Journals, vol. 24(4), pages 369-404.
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