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Statistical tests for equal predictive ability across multiple forecasting methods

Daniel Borup and Martin Thyrsgaard ()
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Martin Thyrsgaard: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We develop a multivariate generalization of the Giacomini-White tests for equal conditional predictive ability. The tests are applicable to a mixture of nested and non-nested models, incorporate estimation uncertainty explicitly, and allow for misspecification of the forecasting model as well as non-stationarity of the data. We introduce two finite-sample corrections, leading to good size and power properties. We also provide a two-step Model Confidence Set-type decision rule for ranking the forecasting methods into sets of indistinguishable conditional predictive ability, particularly suitable in dynamic forecast selection. In the empirical application we consider forecasting of the conditional variance of the S&P500 Index.

Keywords: forecast comparison; multivariate tests of equal predictive ability; Giacomini-White test; Diebold-Mariano test; conditional forecast combination (search for similar items in EconPapers)
JEL-codes: C12 C52 C53 (search for similar items in EconPapers)
Date: 2017-05-17
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