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Tests of equal predictive ability with real-time data

  • Todd E. Clark
  • Michael W. McCracken

This paper examines the asymptotic and finite-sample properties of tests of equal forecast accuracy applied to direct, multi-step predictions from both non-nested and nested linear regression models. In contrast to earlier work in the literature, our asymptotics take account of the real-time, revised nature of the data. Monte Carlo simulations indicate that our asymptotic approximations yield reasonable size and power properties in most circumstances. The paper concludes with an examination of the real-time predictive content of various measures of economic activity for inflation.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-029.

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Date of creation: 2008
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Handle: RePEc:fip:fedlwp:2008-029
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  1. Kenneth D. West & Michael W. McCracken, 1998. "Regression-Based Tests of Predictive Ability," NBER Technical Working Papers 0226, National Bureau of Economic Research, Inc.
  2. Raffella Giacomini & Barbara Rossi, 2005. "Detecting and Predicting Forecast Breakdowns," UCLA Economics Working Papers 845, UCLA Department of Economics.
  3. Evan F. Koenig & Sheila Dolmas & Jeremy M. Piger, 2000. "The use and abuse of "real-time" data in economic forecasting," International Finance Discussion Papers 684, Board of Governors of the Federal Reserve System (U.S.).
  4. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CEPR Discussion Papers 4830, C.E.P.R. Discussion Papers.
  5. Croushore, Dean, 2006. "Forecasting with Real-Time Macroeconomic Data," Handbook of Economic Forecasting, Elsevier.
  6. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  7. Todd E. Clark & Michael W. McCracken, 2003. "The predictive content of the output gap for inflation : resolving in-sample and out-of-sample evidence," Research Working Paper RWP 03-06, Federal Reserve Bank of Kansas City.
  8. James H. Stock & Mark W. Watson, 2001. "Forecasting output and inflation: the role of asset prices," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  9. Dean Croushore & Tom Stark, 2003. "A Real-Time Data Set for Macroeconomists: Does the Data Vintage Matter?," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 605-617, August.
  10. Todd E. Clark & Michael W. McCracken, 2008. "Tests of equal predictive ability with real-time data," Working Papers 2008-029, Federal Reserve Bank of St. Louis.
  11. Corradi, Valentina & Swanson, Norman R. & Olivetti, Claudia, 2001. "Predictive ability with cointegrated variables," Journal of Econometrics, Elsevier, vol. 104(2), pages 315-358, September.
  12. Jon Faust & John H. Rogers & Jonathan H. Wright, 2000. "News and noise in G-7 GDP announcements," International Finance Discussion Papers 690, Board of Governors of the Federal Reserve System (U.S.).
  13. Tom Stark & Dean Croushore, 2001. "Forecasting with a real-time data set for macroeconomists," Working Papers 01-10, Federal Reserve Bank of Philadelphia.
  14. Todd Clark & Michael McCracken, 2005. "Evaluating Direct Multistep Forecasts," Econometric Reviews, Taylor & Francis Journals, vol. 24(4), pages 369-404.
  15. repec:cdl:ucsdec:qt5jk0j5jh is not listed on IDEAS
  16. 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.
  17. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October.
  18. Corradi, V. & Swanson, N.R., 2000. "A Consistent Test for Nonlinear Out of Sample Predictive Accuracy," Discussion Papers 0012, Exeter University, Department of Economics.
  19. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  20. 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 703-08, May.
  21. Todd E. Clark & Michael W. McCracken, 1999. "Tests of equal forecast accuracy and encompassing for nested models," Research Working Paper 99-11, Federal Reserve Bank of Kansas City.
  22. Raffaella Giacomini & Halbert White, 2003. "Tests of conditional predictive ability," Boston College Working Papers in Economics 572, Boston College Department of Economics.
  23. Chao, John & Corradi, Valentina & Swanson, Norman R., 2001. "Out-Of-Sample Tests For Granger Causality," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 598-620, September.
  24. John C. Robertson & Ellis W. Tallman, 1998. "Data vintages and measuring forecast model performance," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 4-20.
  25. Aruoba, Boragan, 2005. "Data Revisions Are Not Well-Behaved," CEPR Discussion Papers 5271, C.E.P.R. Discussion Papers.
  26. Swanson, N.R., 1996. "Forecasting Using First Available Versus Fully Revised Economic Time Series data," Papers 4-96-7, Pennsylvania State - Department of Economics.
  27. repec:att:wimass:9417 is not listed on IDEAS
  28. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
  29. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  30. Howrey, E Philip, 1978. "The Use of Preliminary Data in Econometric Forecasting," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 193-200, May.
  31. Kenneth D. West, 1994. "Asymptotic Inference About Predictive Ability," Macroeconomics 9410002, EconWPA.
  32. Mc Cracken, Michael W., 2000. "Robust out-of-sample inference," Journal of Econometrics, Elsevier, vol. 99(2), pages 195-223, December.
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