A Predictability Test for a Small Number of Nested Models

32 Pages Posted: 28 Mar 2012 Last revised: 27 Oct 2016

See all articles by Eleonora Granziera

Eleonora Granziera

Bank of Finland

Kirstin Hubrich

Board of Governors of the Federal Reserve System

Hyungsik Roger Moon

University of Southern California - Department of Economics; USC Dornsife Institute for New Economic Thinking

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2013

Abstract

In this paper we introduce tests of Likelihood Ratio types for one sided multivariate hypothesis to evaluate the null that a parsimonious model performs equally well as a small number of models which nest the benchmark. We show that the limiting distributions of the test statistics are non standard. For critical values we consider two approaches: (i) boostrapping and (ii) simulations assuming normality of the mean square prediction error (MSPE) difference. The size and the power performance of the tests are compared via Monte Carlo experiments with two existing tests proposed in Hubrich and West (2010): a chi-squared test and the maximum of t-statistic test. We find that all tests are well sized for one step ahead forecasts; for multi-step forecasts the normal approximation delivers grossly oversized tests, while the bootstrap provides with smaller size distortions. The experiments on the power reveal that the chi-squared test performs last while the ranking between the likelihood-ratio type test and the max-t stat depends on the simulation settings. Last, we apply our test to draw conclusions about the predictive ability of a Phillips type curve for the US core inflation.

Keywords: Out-of sample, point-forecast evaluation, multi-model comparison, predictive ability, direct multi-step forecasts, fixed regressors bootstrap

JEL Classification: C12, C15, C52, C53

Suggested Citation

Granziera, Eleonora and Hubrich, Kirstin and Moon, Hyungsik Roger, A Predictability Test for a Small Number of Nested Models (April 20, 2013). Available at SSRN: https://ssrn.com/abstract=2030306 or http://dx.doi.org/10.2139/ssrn.2030306

Eleonora Granziera (Contact Author)

Bank of Finland ( email )

Snellmaninaukio
Helsinki, Helsinki 00100
Finland

HOME PAGE: http://https://sites.google.com/site/eleonoragranziera/

Kirstin Hubrich

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Hyungsik Roger Moon

University of Southern California - Department of Economics ( email )

KAP 300
Los Angeles, CA 90089-0253
United States
213-740-2108 (Phone)
213-740-8543 (Fax)

USC Dornsife Institute for New Economic Thinking ( email )

3620 S. Vermont Avenue, KAP 364F
Los Angeles, CA 90089-0253
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
17
Abstract Views
365
PlumX Metrics