Forecast Comparisons in Unstable Environments

Raffaella Giacomini () and Barbara Rossi

No 08-04, Working Papers from Duke University, Department of Economics

Abstract: We propose new methods for comparing the relative out-of-sample forecasting performance of two competing models in the presence of possible instabilities. The main idea is to develop a measure of the relative ìlocal forecasting performanceî for the two models, and to investigate its stability over time by means of statistical tests. We propose two tests (the ìFluctuation testî and the test against a ìOne-time Reversalî) that analyze the evolution of the modelsí relative performance over historical samples. In contrast to previous approaches to forecast comparison, which are based on measures of ìglobal performanceî, we focus on the entire time path of the modelsí relative performance, which may contain useful information that is lost when looking for the model that forecasts best on average. We apply our tests to the analysis of the time variation in the out-of-sample forecasting performance of monetary models of exchange rate determination relative to the random walk.

Keywords: Predictive Ability Testing; Instability; Structural Change; Forecast Evaluation (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 (search for similar items in EconPapers)
Pages: 30 Pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-ecm and nep-for
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Citations: View citations in EconPapers (13)

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Journal Article: Forecast comparisons in unstable environments (2010)
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