Forecast Evaluation of Small Nested Model Sets / Kirstin Hubrich, Kenneth D. West.

Format:

Book

Author/Creator:

Hubrich, Kirstin.

Contributor:

National Bureau of Economic Research.

West, Kenneth D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14601.

NBER working paper series no. w14601

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

We propose two new procedures for comparing the mean squared prediction error (MSPE) of a benchmark model to the MSPEs of a small set of alternative models that nest the benchmark. Our procedures compare the benchmark to all the alternative models simultaneously rather than sequentially, and do not require reestimation of models as part of a bootstrap procedure. Both procedures adjust MSPE differences in accordance with Clark and West (2007); one procedure then examines the maximum t-statistic, the other computes a chi-squared statistic. Our simulations examine the proposed procedures and two existing procedures that do not adjust the MSPE differences: a chi-squared statistic, and White's (2000) reality check. In these simulations, the two statistics that adjust MSPE differences have most accurate size, and the procedure that looks at the maximum t-statistic has best power. We illustrate our procedures by comparing forecasts of different models for U.S. inflation.

Notes:

Print version record

December 2008.