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A Test for Superior Predictive Ability

Brown Univ. Dept. of Economics Working Paper No. 01-06

43 Pages Posted: 1 Mar 2004  

Peter Reinhard Hansen

University of North Carolina (UNC) at Chapel Hill - Department of Economics; University of Aarhus - CREATES

Date Written: May 2005

Abstract

We propose a new test for superior predictive ability. The new test compares favorable to the reality check for data snooping (RC), because the former is more powerful and less sensitive to poor and irrelevant alternatives. The improvements are achieved by two modifications of the RC. We employ a studentized test statistic that reduces the influence of erratic forecasts and invoke a sample dependent null distribution. The advantages of the new test are confirmed by Monte Carlo experiments and in an empirical exercise, where we compare a large number of regression-based forecasts of annual US inflation to a simple random walk forecast. The random walk forecast is found to be inferior to regression-based forecasts and, interestingly, the best sample performance is achieved by models that have a Phillips curve structure.

Keywords: Testing for Superior Predictive Ability, Forecasting, Forecast Evaluation, Multiple Comparisons, Inequality Testing.

JEL Classification: C12, C32, C52, C53

Suggested Citation

Hansen, Peter Reinhard, A Test for Superior Predictive Ability (May 2005). Brown Univ. Dept. of Economics Working Paper No. 01-06. Available at SSRN: https://ssrn.com/abstract=264569 or http://dx.doi.org/10.2139/ssrn.264569

Peter Reinhard Hansen (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

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

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