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Assessing predictive accuracy in panel data models with long-range dependence

Daniel Borup, Bent Jesper Christensen () and Yunus Emre Ergemen ()
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Yunus Emre Ergemen: 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: This paper proposes tests of the null hypothesis that model-based forecasts are uninformative in panels, allowing for individual and interactive fixed effects that control for cross-sectional dependence, endogenous predictors, and both short-range and long-range dependence. We consider a Diebold-Mariano style test based on comparison of the model-based forecast and a nested nopredictability benchmark, an encompassing style test of the same null, and a test of pooled uninformativeness in the entire panel. A simulation study shows that the encompassing style test is reasonably sized in finite samples, whereas the Diebold-Mariano style test is oversized. Both tests have non-trivial local power. The methods are applied to the predictive relation between economic policy uncertainty and future stock market volatility in a multi-country analysis.

Keywords: Panel data; predictability; long-range dependence; Diebold-Mariano test; encompassing test (search for similar items in EconPapers)
JEL-codes: C12 C23 C33 C52 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-for and nep-ore
Date: 2019-03-25
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