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Evaluating the accuracy of forecasts from vector autoregressions

Listed author(s):
  • Todd E. Clark
  • Michael W. McCracken

This paper surveys recent developments in the evaluation of point and density forecasts in the context of forecasts made by Vector Autoregressions. Specific emphasis is placed on highlighting those parts of the existing literature that are applicable to direct multi-step forecasts and those parts that are applicable to iterated multi-step forecasts. This literature includes advancements in the evaluation of forecasts in population (based on true, unknown model coefficients) and the evaluation of forecasts in the finite sample (based on estimated model coefficients). The paper then examines in Monte Carlo experiments the finite-sample properties of some tests of equal forecast accuracy, focusing on the comparison of VAR forecasts to AR forecasts. These experiments show the tests to behave as should be expected given the theory. For example, using critical values obtained by bootstrap methods, tests of equal accuracy in population have empirical size about equal to nominal size.

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File URL: http://research.stlouisfed.org/wp/2013/2013-010.pdf
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-010.

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Date of creation: 2013
Handle: RePEc:fip:fedlwp:2013-010
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References listed on IDEAS
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  1. Domenico Giannone & Michele Lenza & Giorgio E. Primiceri, 2012. "Prior Selection for Vector Autoregressions," NBER Working Papers 18467, National Bureau of Economic Research, Inc.
  2. Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 155-186.
  3. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
  4. Andrea Carriero & Todd E. Clark & Massimiliano Marcellino, 2011. "Bayesian VARs: specification choices and forecast accuracy," Working Paper 1112, Federal Reserve Bank of Cleveland.
  5. Todd E. Clark & Michael W. McCracken, 2007. "Averaging forecasts from VARs with uncertain instabilities," Finance and Economics Discussion Series 2007-42, Board of Governors of the Federal Reserve System (U.S.).
  6. Goncalves, Silvia & Kilian, Lutz, 2004. "Bootstrapping autoregressions with conditional heteroskedasticity of unknown form," Journal of Econometrics, Elsevier, vol. 123(1), pages 89-120, November.
  7. Todd E. Clark & Michael W. McCracken, 2000. "Tests of Equal Forecast Accuracy and Encompassing for Nested Models," Econometric Society World Congress 2000 Contributed Papers 0319, Econometric Society.
  8. Schorfheide, Frank, 2005. "VAR forecasting under misspecification," Journal of Econometrics, Elsevier, vol. 128(1), pages 99-136, September.
  9. Gianni Amisano & Raffaella Giacomini, 2005. "Comparing Density Forecsts via Weighted Likelihood Ratio Tests," Working Papers ubs0504, University of Brescia, Department of Economics.
  10. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October.
  11. Kilian, Lutz, 1999. "Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 491-510, Sept.-Oct.
  12. Todd E. Clark & Michael W. McCracken, 2007. "Tests of equal predictive ability with real-time data," Research Working Paper RWP 07-06, Federal Reserve Bank of Kansas City.
  13. Berkowitz, Jeremy, 2001. "Testing Density Forecasts, with Applications to Risk Management," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 465-474, October.
  14. Kadiyala, K. Rao & Karlsson, Sune, 1994. "Numerical Aspects of Bayesian VAR-modeling," SSE/EFI Working Paper Series in Economics and Finance 12, Stockholm School of Economics.
  15. Don Coletti & Stephen Murchison, 2002. "Models in Policy-Making," Bank of Canada Review, Bank of Canada, vol. 2002(Spring), pages 19-26.
  16. Hilde C. Bjørnland & Karsten Gerdrup & Anne Sofie Jore & Christie Smith & Leif Anders Thorsrud, 2009. "Does forecast combination improve Norges Bank inflation forecasts?," Working Paper 2009/01, Norges Bank.
  17. Mc Cracken, Michael W., 2000. "Robust out-of-sample inference," Journal of Econometrics, Elsevier, vol. 99(2), pages 195-223, December.
  18. Gneiting, Tilmann & Raftery, Adrian E., 2007. "Strictly Proper Scoring Rules, Prediction, and Estimation," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 359-378, March.
  19. Kenneth Beauchemin & Saeed Zaman, 2011. "A medium scale forecasting model for monetary policy," Working Paper 1128, Federal Reserve Bank of Cleveland.
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