A Likelihood Ratio and Markov Chain Based Method to Evaluate Density Forecasting

Yushu Li and Jonas Andersson

No 2014/12, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: In this paper, we propose a likelihood ratio and Markov chain based method to evaluate density forecasting. This method can jointly evaluate the unconditional forecasted distribution and dependence of the outcomes. This method is an extension of the widely applied evaluation method for interval forecasting proposed by Christoffersen (1998). It is also a more refined approach than the pure contingency table based density forecasting method in Wallis (2003). We show that our method has very high power against incorrect forecasting distributions and dependence. Moreover, the straightforwardness and ease of application of this joint test provide a high potentiality for further applications in both financial and economical areas.

Keywords: Likelihood ratio test; Markov Chain; Density forecasting (search for similar items in EconPapers)
JEL-codes: C14 C53 C61 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2014-03-25
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for, nep-ger and nep-ore
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Citations: View citations in EconPapers (1)

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