A Predictability Test for a Small Number of Nested Models

36 Pages Posted: 12 Sep 2013

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: August 2013

Abstract

In this paper we introduce Quasi Likelihood Ratio tests for one sided multivariate hypotheses 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) bootstrapping 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 existing equal and superior predictive ability tests for multiple model comparison. We find that our proposed tests are well sized for one step ahead as well as for multi-step ahead forecasts when critical values are bootstrapped. The experiments on the power reveal that the superior predictive ability test performs last while the ranking between the quasi likelihood-ratio test and the other equal predictive ability tests depends on the simulation settings. Last, we apply our test to draw conclusions about the predictive ability of a Phillips type curve for the U.S. core inflation.

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

Suggested Citation

Granziera, Eleonora and Hubrich, Kirstin and Moon, Hyungsik Roger, A Predictability Test for a Small Number of Nested Models (August 2013). ECB Working Paper No. 1580. Available at SSRN: https://ssrn.com/abstract=2308922

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
11
Abstract Views
185
PlumX Metrics