Tests of equal forecast accuracy and encompassing for nested models

Todd Clark and Michael McCracken

No 99-11, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We examine the asymptotic and finite-sample properties of tests for equal forecast accuracy and encompassing applied to 1-step ahead forecasts from nested parametric models. We first derive the asymptotic distributions of two standard tests and one new test of encompassing. Tables of asymptotically valid critical values are provided. Monte Carlo methods are then used to evaluate the size and power of the tests of equal forecast accuracy and encompassing. The simulations indicate that post-sample tests can be reasonably well sized. Of the post-sample tests considered, the encompassing test proposed in this paper is the most powerful. We conclude with an empirical application regarding the predictive content of unemployment for inflation.

Keywords: Forecasting (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Tests of equal forecast accuracy and encompassing for nested models (2001)
Working Paper: Tests of Equal Forecast Accuracy and Encompassing for Nested Models (2000)
Working Paper: Tests of Equal Forecast Accuracy and Encompassing for Nested Models (1999)
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