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Regression-Based Tests of Predictive Ability

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  • West, K.D.
  • McCracken, M.W.

Abstract

We 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. We show that standard regression statistics generally fail to account for error introduced by estimation of these parameters. We propose computationally convenient test statistics that properly account for such error. Simulations indicate that the procedures can work well in samples of size typically available, although there sometimes are substantial size distortions.

Suggested Citation

  • West, K.D. & McCracken, M.W., 1997. "Regression-Based Tests of Predictive Ability," Working papers 9710, Wisconsin Madison - Social Systems.
  • Handle: RePEc:att:wimass:9710
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    More about this item

    Keywords

    TESTS ; FORECASTS ; ECONOMIC MODELS;
    All these keywords.

    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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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