Tests of Conditional Predictive Ability: Some Simulation Evidence

21 Pages Posted: 11 Apr 2019 Last revised: 7 May 2019

See all articles by Michael W. McCracken

Michael W. McCracken

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: March, 2019

Abstract

In this note we provide simulation evidence on the size and power of tests of predictive ability described in Giacomini and White (2006). Our goals are modest but non-trivial. First, we establish that there exist data generating processes that satisfy the null hypotheses of equal finite-sample (un)conditional predictive ability. We then consider various parameterizations of these DGPs as a means of evaluating the size and power properties of the proposed tests. While some of our results reinforce those in Giacomini and White (2006), others do not. We recommend against using the fixed scheme when conducting these tests and provide evidence that very large bandwidths are sometimes required when estimating long-run variances.

Keywords: prediction, out-of-sample, inference

JEL Classification: C12, C52, C53

Suggested Citation

McCracken, Michael W., Tests of Conditional Predictive Ability: Some Simulation Evidence (March, 2019). FRB St. Louis Working Paper No. 2019-11, Available at SSRN: https://ssrn.com/abstract=3368400 or http://dx.doi.org/10.20955/wp.2019.011

Michael W. McCracken (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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