Evaluation and Combination of Conditional Quantile Forecasts

UCSD, Economics Discussion Paper No. 2002-11

30 Pages Posted: 30 Jul 2002

See all articles by Raffaella Giacomini

Raffaella Giacomini

University College London - Department of Economics; University of California, Los Angeles - Department of Economics

Ivana Komunjer

University of California, San Diego (UCSD) - Department of Economics

Date Written: June 2002

Abstract

This paper proposes a method for comparing and combining conditional quantile forecasts based on the principle of 'encompassing'. Our test for conditional quantile forecast encompassing (CQFE) is a test of superior predictive ability, constructed as a Wald-type test on the coefficients of an optimal combination of alternative forecasts. The CQFE test is a 'model free' test that can be used to compare any given number of alternative forecasts, and is relatively easy to implement by GMM techniques appropriately modified to accommodate non-differentiable criterion functions. Further, our theoretical framework provides a basis for combining quantile forecasts, when neither forecast has superior predictive ability. A central feature of our method is the focus on conditional, rather than unconditional expected loss in the formulation of the encompassing test, which links our approach to Christoffersen's (1998)'conditional coverage' test for evaluation of quantile forecasts. An empirical application to the problem of Value at Risk evaluation illustrates the usefulness of the proposed techniques.

Keywords: Encompassing, Forecast Combination, Loss Function, GMM, Value-at-Risk

JEL Classification: C12, C22, C52, C53

Suggested Citation

Giacomini, Raffaella and Komunjer, Ivana, Evaluation and Combination of Conditional Quantile Forecasts (June 2002). UCSD, Economics Discussion Paper No. 2002-11, Available at SSRN: https://ssrn.com/abstract=318728 or http://dx.doi.org/10.2139/ssrn.318728

Raffaella Giacomini (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

University of California, Los Angeles - Department of Economics ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095-1361
United States

Ivana Komunjer

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
(+1 858) 822-0667 (Phone)
(+1 858) 534-0712 (Fax)

HOME PAGE: http://econ.ucsd.edu/komunjer

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