Testing for Unconditional Predictive Ability
Todd E. Clark
Federal Reserve Bank of Cleveland
Michael W. McCracken
Federal Reserve Banks - Federal Reserve Bank of Saint Louis
October 4, 2010
Federal Reserve Bank of St. Louis Working Paper No. 2010-031A
This chapter provides an overview of pseudo-out-of-sample tests of unconditional predictive ability. We begin by providing an overview of the literature, including both empirical applications and theoretical contributions. We then delineate two distinct methodologies for conducting inference: one based on the analytics in West (1996) and the other based on those in Giacomini and White (2006). These two approaches are then carefully described in the context of pairwise tests of equal forecast accuracy between two models. We consider both non-nested and nested comparisons. Monte Carlo evidence provides some guidance as to when the two forms of analytics are most appropriate, in a nested model context.
Number of Pages in PDF File: 32
Keywords: Predictability, Forecast Accuracy, Testing
JEL Classification: C53, C52, C12working papers series
Date posted: October 5, 2010
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