Robust Model Selection in Dynamic Models with an Application to Comparing Predictive Accuracy

CAE Working Paper No. 06-09

49 Pages Posted: 19 Nov 2006

See all articles by Nicholas M. Kiefer

Nicholas M. Kiefer

Cornell University - Department of Economics

Hwan-sik Choi

Purdue University - Department of Consumer Sciences & Retailing

Date Written: September 2006

Abstract

A model selection procedure based on a general criterion function, with an example of the Kullback-Leibler Information Criterion (KLIC) using quasi-likelihood functions, is considered for dynamic non-nested models. We propose a robust test which generalizes Lien and Vuong's (1987) test with a Heteroscadasticity/Autocorrelation (HAC) variance estimator. We use the fixed-b asymptotics developed in Kiefer and Vogelsang (2005) to improve the asymptotic approximation to the sampling distribution of the test statistic. The fixed-b approach is compared with a bootstrap method and the standard normal approximation in Monte Carlo simulations. The fixed-b asymptotics and the bootstrap method are found to be markedly superior to the standard normal approximation. An empirical application for foreign exchange rate forecasting models is presented.

Keywords: Kullback-Leibler Information Center (KLIC), quasi-likelihood, dynamics models, fixed-b asymptotics, bootstrap method, Monte Carlo simulation

JEL Classification: C12, C14, C15, C52

Suggested Citation

Kiefer, Nicholas M. and Choi, Hwan-sik, Robust Model Selection in Dynamic Models with an Application to Comparing Predictive Accuracy (September 2006). CAE Working Paper No. 06-09, Available at SSRN: https://ssrn.com/abstract=945144 or http://dx.doi.org/10.2139/ssrn.945144

Nicholas M. Kiefer (Contact Author)

Cornell University - Department of Economics ( email )

490 Uris Hall
Ithaca, NY 14853-7601
United States

Hwan-sik Choi

Purdue University - Department of Consumer Sciences & Retailing ( email )

812 W. State St
West Lafayette, IN 47907
United States

HOME PAGE: http://sites.google.com/site/choihwansik/

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