Testing Predictive Ability and Power Robustification

Testing Predictive Ability and Power Robustication

One of the approaches to compare forecasting methods is to test whether the risk from a benchmark prediction is smaller than the others. The test can be embedded into a general problem of testing inequality constraints using a one-sided sup functional. Hansen (2005) showed that such tests su¤er from asymptotic bias. This paper generalizes this observation, and proposes a hybrid method to robust...

Testing for Unconditional Predictive Ability

This chapter provides an overview of pseudo-out-of-sample tests of unconditional predictive ability. We begin by providing an overview of the literature, including both empirical applications and theoretical contributions. We then delineate two distinct methodologies for conducting inference: one based on the analytics in West (1996) and the other based on those in Giacomini and White (2006). T...

Testing the Predictive Power of Variable History Web Usage

We present two methods for testing the predictive power of a variable length Markov chain induced from a collection of user web navigation sessions. The collection of sessions is split into a training and a test set. The first method uses a χ statistical test to measure the significance of the distance between the distribution of the probabilities assigned to the test trails by a Markov model b...

Testing long-horizon predictive ability with high persistence, and the Meese-Rogoff puzzle

A well-known puzzle in the international finance literature is that a random walk predicts exchange rates better than economic models (Meese and Rogoff, 1983a,b and 1988). This paper offers a potential explanation for this finding. When exchange rates and fundamentals are highly persistent, long-horizon forecasts of economic models are asymptotically biased by the estimation error in the parame...

Forecasting Organic Food Prices: Emerging Methods for Testing and Evaluating Conditional Predictive Ability