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Forecast Comparisons in Unstable Environments

  • Giacomini, Raffaella
  • Rossi, Barbara

We propose new methods for comparing the relative out-of-sample forecasting performance of two competing models in the presence of possible instabilities. The main idea is to develop a measure of the relative ìlocal forecasting performanceî for the two models, and to investigate its stability over time by means of statistical tests. We propose two tests (the ìFluctuation testî and the test against a ìOne-time Reversalî) that analyze the evolution of the modelsí relative performance over historical samples. In contrast to previous approaches to forecast comparison, which are based on measures of ìglobal performanceî, we focus on the entire time path of the modelsí relative performance, which may contain useful information that is lost when looking for the model that forecasts best on average. We apply our tests to the analysis of the time variation in the out-of-sample forecasting performance of monetary models of exchange rate determination relative to the random walk.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 08-04.

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Length: 30 Pages
Date of creation: 2008
Date of revision:
Handle: RePEc:duk:dukeec:08-4
Contact details of provider: Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
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Web page: http://econ.duke.edu/

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  3. Giacomini, Raffaella & White, Halbert, 2003. "Tests of Conditional Predictive Ability," University of California at San Diego, Economics Working Paper Series qt5jk0j5jh, Department of Economics, UC San Diego.
  4. Raffaella Giacomini & Barbara Rossi, 2009. "Model Comparisons in Unstable Environments," Working Papers 09-10, Duke University, Department of Economics.
  5. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
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  7. Kilian, Lutz & Taylor, Mark P., 2003. "Why is it so difficult to beat the random walk forecast of exchange rates?," Journal of International Economics, Elsevier, vol. 60(1), pages 85-107, May.
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  16. 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.
  17. Rossi, Barbara, 2005. "Optimal Tests For Nested Model Selection With Underlying Parameter Instability," Econometric Theory, Cambridge University Press, vol. 21(05), pages 962-990, October.
  18. Rossi, Barbara, 2002. "Testing Long-horizon Predictive Ability with High Persistence, and the Meese-Rogoff Puzzle," Working Papers 02-10, Duke University, Department of Economics.
  19. Chu, C.S.J. & Hornik, K. & Kuan, C.M., 1993. "Mosum Tests for Parameter Constancy," Papers 9319, Southern California - Department of Economics.
  20. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc.
  21. 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.
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  23. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March.
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