Approximately Normal Tests for Equal Predictive Accuracy in Nested Models

Kenneth West () and Todd Clark

No 326, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: Forecast evaluation often compares a parsimonious null model to a larger model that nests the null model. Under the null that the parsimonious model generates the data, the larger model introduces noise into its forecasts by estimating parameters whose population values are zero. We observe that the mean squared prediction error (MSPE) from the parsimonious model is therefore expected to be smaller than that of the larger model. We describe how to adjust MSPEs to account for this noise. We propose applying standard methods (West (1996)) to test whether the adjusted mean squared error difference is zero. We refer to nonstandard limiting distributions derived in Clark and McCracken (2001, 2005a) to argue that use of standard normal critical values will yield actual sizes close to, but a little less than, nominal size. Simulation evidence supports our recommended procedure.

JEL-codes: C22 C53 E17 F37 (search for similar items in EconPapers)
Date: 2006-08
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for and nep-mac
Note: AP EFG TWP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.nber.org/papers/t0326.pdf (application/pdf)

Related works:
Journal Article: Approximately normal tests for equal predictive accuracy in nested models (2007)
Working Paper: Approximately normal tests for equal predictive accuracy in nested models (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberte:0326

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/t0326

Access Statistics for this paper

More papers in NBER Technical Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().