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Regression-Based Tests of Predictive Ability

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  • West, Kenneth D
  • McCracken, Michael W

Abstract

The authors develop regression-based tests of hypotheses about out of sample prediction errors. Representative tests include ones for zero mean and zero correlation between a prediction error and a vector of predictors. The relevant environments are ones in which predictions depend on estimated parameters. The authors show that standard regression statistics generally fail to account for errors introduced by estimation of these parameters. They propose computationally convenient test statistics that properly account for such errors. Simulations indicate that the procedures can work well in samples of size typically available, although there sometimes are substantial size distortions. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • 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 817-840, November.
  • Handle: RePEc:ier:iecrev:v:39:y:1998:i:4:p:817-40
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    1. Jacob A. Mincer & Victor Zarnowitz, 1969. "The Evaluation of Economic Forecasts," NBER Chapters, in: Economic Forecasts and Expectations: Analysis of Forecasting Behavior and Performance, pages 3-46, National Bureau of Economic Research, Inc.
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    5. Davidson, Russell & MacKinnon, James G, 1984. "Model Specification Tests Based on Artificial Linear Regressions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(2), pages 485-502, June.
    6. Pagan, Adrian R. & Schwert, G. William, 1990. "Alternative models for conditional stock volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 267-290.
    7. West, Kenneth D. & Cho, Dongchul, 1995. "The predictive ability of several models of exchange rate volatility," Journal of Econometrics, Elsevier, vol. 69(2), pages 367-391, October.
    8. 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.
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    16. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-1167, July.
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    18. Wooldridge, Jeffrey M., 1990. "A Unified Approach to Robust, Regression-Based Specification Tests," Econometric Theory, Cambridge University Press, vol. 6(1), pages 17-43, March.
    19. Howrey, E Philip & Klein, Lawrence R & McCarthy, Michael D, 1974. "Notes on Testing the Predictive Performance of Econometric Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(2), pages 366-383, June.
    20. West, Kenneth D & Wilcox, David W, 1996. "A Comparison of Alternative Instrumental Variables Estimators of a Dynamic Linear Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 281-293, July.
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    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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