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Conditional Predictive Density Evaluation in the Presence of Instabilities

Listed author(s):
  • Barbara Rossi
  • Tatevik Sehkposyan

We propose new methods for evaluating predictive densities. The methods include Kolmogorov-Smirnov and Cramer-von Mises-type tests for the correct specification of predictive densities robust to dynamic mis-specification. The novelty is that the tests can detect mis-specification in the predictive densities even if it appears only over a fraction of the sample, due to the presence of instabilities. Our results indicate that our tests are well sized and have good power in detecting mis-specification in predictive densities, even when it is time-varying. An application to density forecasts of the Survey of Professional Forecasters demonstrates the usefulness of the proposed methodologies.

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File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/688.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 688.

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Date of creation: Feb 2013
Handle: RePEc:bge:wpaper:688
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  1. Inoue, Atsushi, 2001. "Testing For Distributional Change In Time Series," Econometric Theory, Cambridge University Press, vol. 17(01), pages 156-187, February.
  2. repec:hal:journl:peer-00834423 is not listed on IDEAS
  3. Valentina Corradi & Norman Swanson, 2004. "Predective Density and Conditional Confidence Interval Accuracy Tests," Departmental Working Papers 200423, Rutgers University, Department of Economics.
  4. West, K.D., 1994. "Asymptotic Inference About Predictive Ability," Working papers 9417, Wisconsin Madison - Social Systems.
  5. Rossi, Barbara, 2002. "Optimal Tests for Nested Model Selection with Underlying Parameter Instability," Working Papers 02-05, Duke University, Department of Economics.
  6. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
  7. van Dijk, D.J.C. & Franses, Ph.H.B.F., 2003. "Selecting a Nonlinear Time Series Model using Weighted Tests of Equal Forecast Accuracy," Econometric Institute Research Papers EI 2003-10, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  8. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-708, May.
  9. Diks, Cees & Panchenko, Valentyn & van Dijk, Dick, 2011. "Likelihood-based scoring rules for comparing density forecasts in tails," Journal of Econometrics, Elsevier, vol. 163(2), pages 215-230, August.
  10. Corradi, Valentina & Swanson, Norman R., 2006. "Predictive Density Evaluation," Handbook of Economic Forecasting, Elsevier.
  11. Yongmiao Hong, 2005. "Nonparametric Specification Testing for Continuous-Time Models with Applications to Term Structure of Interest Rates," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 37-84.
  12. Jushan Bai, 2003. "Testing Parametric Conditional Distributions of Dynamic Models," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 531-549, August.
  13. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1163-1212, May.
  14. Gianni Amisano & Raffaella Giacomini, 2005. "Comparing Density Forecsts via Weighted Likelihood Ratio Tests," Working Papers ubs0504, University of Brescia, Department of Economics.
  15. Valentina Corradi & Norman R. Swanson, 2003. "Bootstrap Conditional Distribution Tests In the Presence of Dynamic Misspecification," Departmental Working Papers 200311, Rutgers University, Department of Economics.
  16. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-883, November.
  17. Corradi, Valentina & Swanson, Norman R., 2007. "Evaluation of dynamic stochastic general equilibrium models based on distributional comparison of simulated and historical data," Journal of Econometrics, Elsevier, vol. 136(2), pages 699-723, February.
  18. Valentina Corradi & Norman Swanson, 2006. "Predictive Density Evaluation. Revised," Departmental Working Papers 200621, Rutgers University, Department of Economics.
  19. Andrade, P. & Ghysels, E. & Idier, J., 2012. "Tails of Inflation Forecasts and Tales of Monetary Policy," Working papers 407, Banque de France.
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