IDEAS home Printed from https://ideas.repec.org/a/eee/intfor/v30y2014i1p30-42.html
   My bibliography  Save this article

Testing the value of directional forecasts in the presence of serial correlation

Author

Listed:
  • Blaskowitz, Oliver
  • Herwartz, Helmut

Abstract

Common approaches to testing the economic value of directional forecasts are based on the classical χ2-test for independence, Fisher’s exact test or the Pesaran and Timmermann test for market timing. These tests are asymptotically valid for serially independent observations, but in the presence of serial correlation they are markedly oversized, as has been confirmed in a simulation study. We therefore summarize robust test procedures for serial correlation and propose a bootstrap approach, the relative merits of which we illustrate by means of a Monte Carlo study. Our evaluations of directional predictions of stock returns and changes in Euribor rates demonstrate the importance of accounting for serial correlation in economic time series when making such predictions.

Suggested Citation

  • Blaskowitz, Oliver & Herwartz, Helmut, 2014. "Testing the value of directional forecasts in the presence of serial correlation," International Journal of Forecasting, Elsevier, vol. 30(1), pages 30-42.
    • Handle: RePEc:eee:intfor:v:30:y:2014:i:1:p:30-42
    DOI: 10.1016/j.ijforecast.2013.06.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0169207013000873
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijforecast.2013.06.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Easaw, Joshy Z. & Garratt, Dean & Heravi, Saeed M., 2005. "Does consumer sentiment accurately forecast UK household consumption? Are there any comparisons to be made with the US?," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 517-532, September.
    2. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-533, October.
    3. Jing Yang & Nikola Gradojevic, 2006. "Non-linear, non-parametric, non-fundamental exchange rate forecasting," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(4), pages 227-245.
    4. Pesaran, M Hashem & Timmermann, Allan, 1992. "A Simple Nonparametric Test of Predictive Performance," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(4), pages 561-565, October.
    5. Havenner, Arthur & Modjtahedi, Bagher, 1988. "Foreign exchange rates : A multiple currency and maturity analysis," Journal of Econometrics, Elsevier, vol. 37(2), pages 251-264, February.
    6. Donald W. K. Andrews, 2002. "Higher-Order Improvements of a Computationally Attractive "k"-Step Bootstrap for Extremum Estimators," Econometrica, Econometric Society, vol. 70(1), pages 119-162, January.
    7. repec:bla:jfinan:v:44:y:1989:i:5:p:1177-89 is not listed on IDEAS
    8. Lahiri, Soumendra Nath, 1991. "Second order optimality of stationary bootstrap," Statistics & Probability Letters, Elsevier, vol. 11(4), pages 335-341, April.
    9. Lai, Kon S., 1990. "An evaluation of survey exchange rate forecasts," Economics Letters, Elsevier, vol. 32(1), pages 61-65, January.
    10. Norman R. Swanson & Halbert White, 1997. "A Model Selection Approach To Real-Time Macroeconomic Forecasting Using Linear Models And Artificial Neural Networks," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 540-550, November.
    11. Mills, Terence C. & Pepper, Gordon T., 1999. "Assessing the forecasters: an analysis of the forecasting records of the Treasury, the London Business School and the National Institute," International Journal of Forecasting, Elsevier, vol. 15(3), pages 247-257, July.
    12. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 631-653.
    13. Cumby, Robert E. & Modest, David M., 1987. "Testing for market timing ability : A framework for forecast evaluation," Journal of Financial Economics, Elsevier, vol. 19(1), pages 169-189, September.
    14. Masahiro Ashiya, 2006. "Are 16-month-ahead forecasts useful? A directional analysis of Japanese GDP forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(3), pages 201-207.
    15. Ash, J. C. K. & Smyth, D. J. & Heravi, S. M., 1998. "Are OECD forecasts rational and useful?: a directional analysis," International Journal of Forecasting, Elsevier, vol. 14(3), pages 381-391, September.
    16. Chou, Cheng & Chu, Chia-Shang J., 2011. "Market timing: Recent development and a new test," Economics Letters, Elsevier, vol. 111(2), pages 105-109, May.
    17. Inoue, Atsushi & Shintani, Mototsugu, 2006. "Bootstrapping GMM estimators for time series," Journal of Econometrics, Elsevier, vol. 133(2), pages 531-555, August.
    18. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    19. Schnader, M H & Stekler, H O, 1990. "Evaluating Predictions of Change," The Journal of Business, University of Chicago Press, vol. 63(1), pages 99-107, January.
    20. Whitney Newey & Kenneth West, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    21. Pesaran, M. Hashem & Timmermann, Allan, 2009. "Testing Dependence Among Serially Correlated Multicategory Variables," Journal of the American Statistical Association, American Statistical Association, vol. 104(485), pages 325-337.
    22. Lahiri, Kajal & Yang, Liu, 2013. "Forecasting Binary Outcomes," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 1025-1106, Elsevier.
    23. Raffaella Giacomini & Halbert White, 2006. "Tests of Conditional Predictive Ability," Econometrica, Econometric Society, vol. 74(6), pages 1545-1578, November.
    24. Masahiro Ashiya, 2003. "The directional accuracy of 15-months-ahead forecasts made by the IMF," Applied Economics Letters, Taylor & Francis Journals, vol. 10(6), pages 331-333.
    25. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
    26. Oller, Lars-Erik & Barot, Bharat, 2000. "The accuracy of European growth and inflation forecasts," International Journal of Forecasting, Elsevier, vol. 16(3), pages 293-315.
    27. Andrew Patton & Dimitris Politis & Halbert White, 2009. "Correction to “Automatic Block-Length Selection for the Dependent Bootstrap” by D. Politis and H. White," Econometric Reviews, Taylor & Francis Journals, vol. 28(4), pages 372-375.
    28. Swanson, Norman R. & White, Halbert, 1997. "Forecasting economic time series using flexible versus fixed specification and linear versus nonlinear econometric models," International Journal of Forecasting, Elsevier, vol. 13(4), pages 439-461, December.
    29. Dimitris Politis & Halbert White, 2004. "Automatic Block-Length Selection for the Dependent Bootstrap," Econometric Reviews, Taylor & Francis Journals, vol. 23(1), pages 53-70.
    30. Chu, Chia-Shang & Lu, Liping & Shi, Zhentao, 2009. "Pitfalls in market timing test," Economics Letters, Elsevier, vol. 103(3), pages 123-126, June.
    31. Lahiri, Soumendra Nath, 1996. "On Edgeworth Expansion and Moving Block Bootstrap for StudentizedM-Estimators in Multiple Linear Regression Models," Journal of Multivariate Analysis, Elsevier, vol. 56(1), pages 42-59, January.
    32. Radulovic, Dragan, 1996. "The bootstrap of the mean for strong mixing sequences under minimal conditions," Statistics & Probability Letters, Elsevier, vol. 28(1), pages 65-72, June.
    33. Oliver Blaskowitz & Helmut Herwartz, 2009. "Adaptive forecasting of the EURIBOR swap term structure," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(7), pages 575-594.
    34. Hall, Peter & Horowitz, Joel L, 1996. "Bootstrap Critical Values for Tests Based on Generalized-Method-of-Moments Estimators," Econometrica, Econometric Society, vol. 64(4), pages 891-916, July.
    35. Mark Greer, 2005. "Combination forecasting for directional accuracy: An application to survey interest rate forecasts," Journal of Applied Statistics, Taylor & Francis Journals, vol. 32(6), pages 607-615.
    36. Cicarelli, James, 1982. "A new method of evaluating the accuracy of economic forecasts," Journal of Macroeconomics, Elsevier, vol. 4(4), pages 469-475.
    37. Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, vol. 54(3), pages 363-406, July.
    38. Jordi Pons, 2001. "The rationality of price forecasts: a directional analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 287-290.
    39. Swanson, Norman R & White, Halbert, 1995. "A Model-Selection Approach to Assessing the Information in the Term Structure Using Linear Models and Artificial Neural Networks," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 265-275, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cribari-Neto, Francisco & Scher, Vinícius T. & Bayer, Fábio M., 2023. "Beta autoregressive moving average model selection with application to modeling and forecasting stored hydroelectric energy," International Journal of Forecasting, Elsevier, vol. 39(1), pages 98-109.
    2. Kamil Kladívko & Pär Österholm, 2024. "An Analysis of UK Households’ Directional Forecasts of Interest Rates," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 20(3), pages 423-442, November.
    3. Hambuckers, J. & Ulm, M., 2023. "On the role of interest rate differentials in the dynamic asymmetry of exchange rates," Economic Modelling, Elsevier, vol. 129(C).
    4. Casarin, Roberto & Costantini, Mauro & Paradiso, Antonio, 2021. "On the role of dependence in sticky price and sticky information Phillips curve: Modelling and forecasting," Economic Modelling, Elsevier, vol. 105(C).
    5. Chen, Qiwei & Costantini, Mauro & Deschamps, Bruno, 2016. "How accurate are professional forecasts in Asia? Evidence from ten countries," International Journal of Forecasting, Elsevier, vol. 32(1), pages 154-167.
    6. Hartmann, Matthias & Herwartz, Helmut & Ulm, Maren, 2017. "A comparative assessment of alternative ex ante measures of inflation uncertainty," International Journal of Forecasting, Elsevier, vol. 33(1), pages 76-89.
    7. Kladívko, Kamil & Österholm, Pär, 2021. "Do market participants’ forecasts of financial variables outperform the random-walk benchmark?," Finance Research Letters, Elsevier, vol. 40(C).
    8. Kajal Lahiri & Liu Yang, 2018. "Confidence Bands for ROC Curves With Serially Dependent Data," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(1), pages 115-130, January.
    9. Christian Pierdzioch & Monique B. Reid & Rangan Gupta, 2018. "On the directional accuracy of inflation forecasts: evidence from South African survey data," Journal of Applied Statistics, Taylor & Francis Journals, vol. 45(5), pages 884-900, April.
    10. G. Kontogeorgos & K. Lambrias, 2022. "Evaluating the Eurosystem/ECB staff macroeconomic projections: The first 20 years," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(2), pages 213-229, March.
    11. Kladivko, Kamil & Österholm, Pär, 2020. "Can Households Predict where the Macroeconomy is Headed?," Working Papers 2020:11, Örebro University, School of Business.
    12. Kiss, Tamás & Kladívko, Kamil & Silfverberg, Oliwer & Österholm, Pär, 2023. "Market participants or the random walk – who forecasts better? Evidence from micro-level survey data," Finance Research Letters, Elsevier, vol. 54(C).
    13. Darvas, Zsolt & Schepp, Zoltán, 2025. "Forecasting the daily exchange rate of the UK pound sterling against the US dollar," Finance Research Letters, Elsevier, vol. 71(C).
    14. Santamaría-Bonfil, G. & Reyes-Ballesteros, A. & Gershenson, C., 2016. "Wind speed forecasting for wind farms: A method based on support vector regression," Renewable Energy, Elsevier, vol. 85(C), pages 790-809.
    15. Bergmeir, Christoph & Costantini, Mauro & Benítez, José M., 2014. "On the usefulness of cross-validation for directional forecast evaluation," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 132-143.
    16. Kontogeorgos, Georgios & Lambrias, Kyriacos, 2019. "An analysis of the Eurosystem/ECB projections," Working Paper Series 2291, European Central Bank.
    17. Constantin Bürgi & Dorine Boumans, 2020. "Categorical Forecasts and Non-Categorical Loss Functions," CESifo Working Paper Series 8266, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:hum:wpaper:sfb649dp2008-073 is not listed on IDEAS
    2. Blaskowitz, Oliver J. & Herwartz, Helmut, 2008. "Testing directional forecast value in the presence of serial correlation," SFB 649 Discussion Papers 2008-073, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    3. Tsuchiya, Yoichi, 2013. "Do corporate executives have accurate predictions for the economy? A directional analysis," Economic Modelling, Elsevier, vol. 30(C), pages 167-174.
    4. Tsuchiya, Yoichi, 2016. "Do production managers predict turning points? A directional analysis," Economic Modelling, Elsevier, vol. 58(C), pages 1-8.
    5. Blaskowitz, Oliver J. & Herwartz, Helmut, 2009. "On economic evaluation of directional forecasts," SFB 649 Discussion Papers 2009-052, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    6. Y. Tsuchiya, 2014. "A directional evaluation of corporate executives' exchange rate forecasts," Applied Economics, Taylor & Francis Journals, vol. 46(1), pages 95-101, January.
    7. Lahiri, Kajal & Yang, Liu, 2013. "Forecasting Binary Outcomes," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 1025-1106, Elsevier.
    8. Tsuchiya, Yoichi, 2013. "Are government and IMF forecasts useful? An application of a new market-timing test," Economics Letters, Elsevier, vol. 118(1), pages 118-120.
    9. Tsuchiya, Yoichi, 2014. "Purchasing and supply managers provide early clues on the direction of the US economy: An application of a new market-timing test," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 599-618.
    10. Oliver Blaskowitz & Helmut Herwartz, 2009. "Adaptive forecasting of the EURIBOR swap term structure," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(7), pages 575-594.
    11. Greer, Mark, 2003. "Directional accuracy tests of long-term interest rate forecasts," International Journal of Forecasting, Elsevier, vol. 19(2), pages 291-298.
    12. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    13. Tsuchiya, Yoichi, 2016. "Directional analysis of fiscal sustainability: Revisiting Domar's debt sustainability condition," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 189-201.
    14. IIZUKA Nobuo, 2013. "Predicting Business Cycle Phases by Professional Forecasters－ Are They Useful ?," ESRI Discussion paper series 305, Economic and Social Research Institute (ESRI).
    15. Paulo M. D. C. Parente & Richard J. Smith, 2021. "Quasi‐maximum likelihood and the kernel block bootstrap for nonlinear dynamic models," Journal of Time Series Analysis, Wiley Blackwell, vol. 42(4), pages 377-405, July.
    16. Härdle, Wolfgang & Horowitz, Joel L. & Kreiss, Jens-Peter, 2001. "Bootstrap methods for time series," SFB 373 Discussion Papers 2001,59, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    17. Lahiri, Kajal & Peng, Huaming & Zhao, Yongchen, 2015. "Testing the value of probability forecasts for calibrated combining," International Journal of Forecasting, Elsevier, vol. 31(1), pages 113-129.
    18. repec:hum:wpaper:sfb649dp2008-017 is not listed on IDEAS
    19. Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521779654, June.
    20. Kontogeorgos, Georgios & Lambrias, Kyriacos, 2019. "An analysis of the Eurosystem/ECB projections," Working Paper Series 2291, European Central Bank.
    21. Mihaela Simionescu, 2014. "Directional accuracy for inflation and unemployment rate predictions in Romania," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 7(2), pages 129-138, September.
    22. Hamid Baghestani, 2011. "A directional analysis of Federal Reserve predictions of growth in unit labor costs and productivity," International Review of Applied Economics, Taylor & Francis Journals, vol. 25(3), pages 303-311.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfor:v:30:y:2014:i:1:p:30-42. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ijforecast .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.