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Forecast Encompassing Tests and Probability Forecasts

  • Clements, Michael P

    (Department of Economics, University of Warwick)

  • Harvey, David I

    (School of Economics, University of Nottingham)

We consider tests of forecast encompassing for probability forecasts, for both quadratic and logarithmic scoring rules. We propose test statistics for the null of forecast encompassing, present the limiting distributions of the test statistics, and investigate the impact of estimating the forecasting models’ parameters on these distributions. The small-sample performance of the various statistics is investigated, both in terms of small numbers of forecasts and model estimation sample sizes. Two empirical applications show the usefulness of the tests for the evaluation of recession probability forecasts from logit models with different leading indicators as explanatory variables, and for evaluating survey-based probability forecasts. Probability forecasts ; encompassing tests ; recession probabilities

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2006/twerp_774.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 774.

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Length: 37 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:wrk:warwec:774
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