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Multivariate Forecast Evaluation And Rationality Testing

  • Komunjer, Ivana
  • OWYANG, MICHAEL

In this paper, we propose a new family of multivariate loss functions that can be used to test the rationality of vector forecasts without assuming independence across individual variables. When only one variable is of interest, the loss function reduces to the flexible asymmetric family recently proposed by Elliott, Komunjer, and Timmermann (2005). Following their methodology, we derive a GMM test for multivaariate forecast rationality that allows the forecast errors to be dependent, and takes into account forecast estimation ucertainty. We use our test to study the rationality of macroeconomic vector forecasts in the growth rate in nominal output, the CPI inflation rate, and a short-term interest rate.

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt81w8m5sf.

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Date of creation: 01 Nov 2007
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Handle: RePEc:cdl:ucsdec:qt81w8m5sf
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  13. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
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  16. Carl S Bonham & Richard H Cohen, 2000. "Testing the Rational Expectations Hypothesis using Survey Data," Working Papers 200007, University of Hawaii at Manoa, Department of Economics.
  17. Geert Bekaert & Robert J. Hodrick, 2000. "Expectations Hypotheses Tests," NBER Working Papers 7609, National Bureau of Economic Research, Inc.
  18. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  19. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
  20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  21. Ulrich K. Müller & Gebhard Kirchgässner, 2006. "Are forecasters reluctant to revise their predictions? Some German evidence," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(6), pages 401-413.
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