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Understanding models' forecasting performance

  • Rossi, Barbara
  • Sekhposyan, Tatevik

We propose a new methodology to identify the sources of models' forecasting performance. The methodology decomposes the models' forecasting performance into asymptotically uncorrelated components that measure instabilities in the forecasting performance, predictive content, and over-fitting. The empirical application shows the usefulness of the new methodology for understanding the causes of the poor forecasting ability of economic models for exchange rate determination.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 164 (2011)
Issue (Month): 1 (September)
Pages: 158-172

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Handle: RePEc:eee:econom:v:164:y:2011:i:1:p:158-172
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  4. Richard Meese & Kenneth Rogoff, 1982. "The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?," International Finance Discussion Papers 204, Board of Governors of the Federal Reserve System (U.S.).
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  8. Michael W. McCracken & Todd E. Clark, 2003. "The Predictive Content of the Output Gap for Inflation: Resolving In-Sample and Out-of-Sample Evidence," Computing in Economics and Finance 2003 183, Society for Computational Economics.
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  12. West, Kenneth D, 1996. "Asymptotic Inference about Predictive Ability," Econometrica, Econometric Society, vol. 64(5), pages 1067-84, September.
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  15. Philippe Bacchetta & Eric van Wincoop & Toni Beutler, 2010. "Can Parameter Instability Explain the Meese-Rogoff Puzzle?," NBER Chapters, in: NBER International Seminar on Macroeconomics 2009, pages 125-173 National Bureau of Economic Research, Inc.
  16. Kenneth D. West, 1994. "Asymptotic Inference about Predictive Ability, An Additional Appendix," Macroeconomics 9410003, EconWPA.
  17. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  18. Charles Engel & Nelson C. Mark & Kenneth D. West, 2007. "Exchange Rate Models Are Not as Bad as You Think," NBER Working Papers 13318, National Bureau of Economic Research, Inc.
  19. Todd E. Clark & Kenneth D. West, 2005. "Approximately normal tests for equal predictive accuracy in nested models," Research Working Paper RWP 05-05, Federal Reserve Bank of Kansas City.
  20. Mc Cracken, Michael W., 2000. "Robust out-of-sample inference," Journal of Econometrics, Elsevier, vol. 99(2), pages 195-223, December.
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