Tests of Conditional Predictive Ability: Existence, Size, and Power

Michael McCracken

No 2020-050, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We investigate a test of conditional predictive ability described in Giacomini and White (2006; Econometrica). Our main goal is simply to demonstrate existence of the null hypothesis and, in doing so, clarify just how unlikely it is for this hypothesis to hold. We do so using a simple example of point forecasting under quadratic loss. We then provide simulation evidence on the size and power of the test. While the test can be accurately sized we find that power is typically low.

Keywords: prediction; out-of-sample; inference (search for similar items in EconPapers)
JEL-codes: C12 C52 C53 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2020-12-18
New Economics Papers: this item is included in nep-ecm and nep-ets
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DOI: 10.20955/wp.2020.050

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