Abstract

http://ssrn.com/abstract=358500
 
 

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In-Sample or Out-of-Sample Tests of Predictability: Which One Should We Use?


Atsushi Inoue


Southern Methodist University

Lutz Kilian


University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

November 2002

ECB Working Paper No. 195

Abstract:     
It is widely known that significant in-sample evidence of predictability does not guarantee significant out-of-sample predictability. This is often interpreted as an indication that in-sample evidence is likely to be spurious and should be discounted. In this paper we question this conventional wisdom. Our analysis shows that neither data mining nor parameter instability is a plausible explanation of the observed tendency of in-sample tests to reject the no predictability null more often than out-of-sample tests. We provide an alternative explanation based on the higher power of in-sample tests of predictability. We conclude that results of in-sample tests of predictability will typically be more credible than results of out-of-sample tests.

Number of Pages in PDF File: 43

Keywords: Predictability test, data mining, structural change, out-of-sample inference

JEL Classification: C12, C22, C52

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Date posted: February 27, 2003  

Suggested Citation

Inoue, Atsushi and Kilian, Lutz, In-Sample or Out-of-Sample Tests of Predictability: Which One Should We Use? (November 2002). ECB Working Paper No. 195. Available at SSRN: http://ssrn.com/abstract=358500

Contact Information

Atsushi Inoue
Southern Methodist University ( email )
Dallas, TX 75275
United States
Lutz Kilian (Contact Author)
University of Michigan at Ann Arbor - Department of Economics ( email )
611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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