Forecast encompassing tests and probability forecasts

Michael Peter Clements and David I. Harvey
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David I. Harvey: School of Economics, University of Nottingham, UK, Postal: School of Economics, University of Nottingham, UK

Journal of Applied Econometrics, 2010, vol. 25, issue 6, pages 1028-1062

Abstract: We consider tests of forecast encompassing for probability forecasts, for both quadratic and logarithmic scoring rules. We propose test statistics for the null of forecast encompassing, present the limiting distributions of the test statistics, and investigate the impact of estimating the forecasting models' parameters on these distributions. The small-sample performance is investigated, in terms of small numbers of forecasts and model estimation sample sizes. We show the usefulness of the tests for the evaluation of recession probability forecasts from logit models with different leading indicators as explanatory variables, and for evaluating survey-based probability forecasts. Copyright © 2009 John Wiley & Sons, Ltd.

Date: 2010
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Related works:
Working Paper: Forecast Encompassing Tests and Probability Forecasts (2006)
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