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Partial Likelihood-Based Scoring Rules for Evaluating Density Forecasts in Tails

Author

Listed:
  • Cees Diks

    (University of Amsterdam)

  • Valentyn Panchenko

    (School of Economics, University of New South Wales)

  • Dick van Dijk

    (Econometric Institute, Erasmus University Rotterdam)

Abstract

We propose new scoring rules based on partial likelihood for assessing the relative out-of-sample predictive accuracy of competing density forecasts over a specific region of interest, such as the left tail in financial risk management. By construction, existing scoring rules based on weighted likelihood or censored normal likelihood favor density forecasts with more probability mass in the given region, rendering predictive accuracy tests biased towards such densities. Our novel partial likelihoodbased scoring rules do not suffer from this problem, as illustrated by means of Monte Carlo simulations and an empirical application to daily S&P 500 index returns.

Suggested Citation

  • Cees Diks & Valentyn Panchenko & Dick van Dijk, 2008. "Partial Likelihood-Based Scoring Rules for Evaluating Density Forecasts in Tails," Discussion Papers 2008-10, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2008-10
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    File URL: http://wwwdocs.fce.unsw.edu.au/economics/Research/WorkingPapers/2008_10.pdf
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    References listed on IDEAS

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    Cited by:

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    2. Anne Sofie Jore & James Mitchell & Shaun P. Vahey, 2010. "Combining forecast densities from VARs with uncertain instabilities," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 621-634.
    3. Geweke, John & Amisano, Gianni, 2010. "Comparing and evaluating Bayesian predictive distributions of asset returns," International Journal of Forecasting, Elsevier, vol. 26(2), pages 216-230, April.
    4. Hoogerheide, Lennart F. & Ardia, David & Corré, Nienke, 2012. "Density prediction of stock index returns using GARCH models: Frequentist or Bayesian estimation?," Economics Letters, Elsevier, vol. 116(3), pages 322-325.

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    More about this item

    Keywords

    density forecast evaluation; scoring rules; weighted likelihood ratio scores; partial likelihood; risk management.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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