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In-sample tests of predictive ability: A new approach

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

This paper presents evidence linking in-sample tests of predictive content and out-of-sample forecast accuracy. Our approach focuses on the negative effect that finite-sample estimation error has on forecast accuracy despite the presence of significant population-level predictive content. We derive in-sample tests that assess whether a variable has predictive content and whether this content is estimated precisely enough to improve forecast accuracy. Our tests are asymptotically non-central chi-square or non-central normal. We provide a convenient bootstrap for computing critical values. In Monte Carlo and empirical analysis, we examine the effectiveness of our testing procedure.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 170 (2012)
Issue (Month): 1 ()
Pages: 1-14

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Handle: RePEc:eee:econom:v:170:y:2012:i:1:p:1-14
DOI: 10.1016/j.jeconom.2010.09.012
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