Regression-Based Tests of Predictive Ability

Kenneth D. West · Michael W. McCracken

286 citations0/0 files storedInternational Economic Review

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Forecasting Techniques and Applications Statistical Methods and Inference Advanced Statistical Methods and Models

Abstract

We develop regression-based tests of hypotheses about out of sample prediction errors.Representative tests include ones for zero mean and zero correlation between a prediction error and a vector of predictors.The relevant environments are ones in which predictions depend on estimated parameters.We show that standard regression statistics generally fail to account for error introduced by estimation of these parameters.We propose computationally convenient test statistics that properly account for such error.Simulations indicate that the procedures can work well in samples of size typically available, although there sometimes are substantial size distortions.

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References

1994Comparing Predictive Accuracy 1983Empirical exchange rate models of the seventies 1991Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation 1994Automatic Lag Selection in Covariance Matrix Estimation 1996Asymptotic Inference about Predictive Ability 1990Alternative models for conditional stock volatility 1989Conditional Heteroscedasticity in Time Series of Stock Returns: Evidence and Forecasts 1986Econometric Evaluation of Linear Macro-Economic Models

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