Assessing predictive accuracy in panel data models with long-range dependence
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
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
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2019-04
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