A Test for Superior Predictive Ability
Brown Univ. Dept. of Economics Working Paper No. 01-06
43 Pages Posted: 1 Mar 2004
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Tests of Equal Forecast Accuracy and Encompassing for Nested Models
-
Long Swings in the Exchange Rate: are They in the Data and Do Markets Know it?
-
Exchange Rates and Fundamentals
By Charles M. Engel and Kenneth D. West
-
Exchange Rates and Fundamentals
By Charles M. Engel and Kenneth D. West
-
Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?
-
Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?
By Lutz Kilian
-
Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?
By Yin-wong Cheung, Menzie David Chinn, ...