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Regression-Based Tests of Predictive Ability

  • West, Kenneth D
  • McCracken, Michael W

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.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 39 (1998)
Issue (Month): 4 (November)
Pages: 817-40

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Handle: RePEc:ier:iecrev:v:39:y:1998:i:4:p:817-40
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  1. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  2. Hoffman, Dennis L & Pagan, Adrian R, 1989. "Post-Sample Prediction Tests for Generalized Method of Moments Estimators," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(3), pages 333-43, August.
  3. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  4. Berger, Allen N & Krane, Spencer D, 1985. "The Information Efficiency of Econometric Model Forecasts," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 128-34, February.
  5. West, K.D. & Wilcox, D.W., 1994. "A Comparison of Alternative Instrumental Variables Estimators of Dynamic Linear Model," Working papers 9414, Wisconsin Madison - Social Systems.
  6. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-89, June.
  7. Pagan, Adrian R. & Schwert, G. William, 1990. "Alternative models for conditional stock volatility," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 267-290.
  8. 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.
  9. 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 1-46 National Bureau of Economic Research, Inc.
  10. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  11. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 631-53, October.
  12. Russell Davidson & James G. MacKinnon, 1981. "Model Specification Tests Based on Artificial Linear Regressions," Working Papers 426, Queen's University, Department of Economics.
  13. Kenneth D. West, 1994. "Asymptotic Inference About Predictive Ability," Macroeconomics 9410002, EconWPA.
  14. Wooldridge, Jeffrey M., 1990. "A Unified Approach to Robust, Regression-Based Specification Tests," Econometric Theory, Cambridge University Press, vol. 6(01), pages 17-43, March.
  15. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  16. Todd E. Clark, 1996. "Finite-sample properties of tests for forecast equivalence," Research Working Paper 96-03, Federal Reserve Bank of Kansas City.
  17. Kenneth D. West & David W. Wilcox, 1995. "A Comparison of Alternative Instruments Variables Estimators of a Dynamic Linear Model," NBER Technical Working Papers 0176, National Bureau of Economic Research, Inc.
  18. 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 366-83, June.
  19. repec:cup:etheor:v:6:y:1990:i:1:p:17-43 is not listed on IDEAS
  20. Francis X. Diebold & James M. Nason, 1989. "Nonparametric exchange rate prediction?," Finance and Economics Discussion Series 81, Board of Governors of the Federal Reserve System (U.S.).
  21. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-67, July.
  22. Chong, Yock Y & Hendry, David F, 1986. "Econometric Evaluation of Linear Macro-Economic Models," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 671-90, August.
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