Tests of equal forecast accuracy and encompassing for nested models

Clark, Todd E.; McCracken, Michael W.

doi:10.1016/s0304-4076(01)00071-9

Cited by 943 publications

(382 citation statements)

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“…The limiting distribution for h > 1 is non-standard, as discussed in Clark and McCracken (2001). As long as a Newey and West (1987) type estimator is used when h > 1, however, then the tabulated critical values closely approximate the N(0, 1) values (Bhardwaj and Swanson, 2006).…”

Section: Measuring Model Forecast Performancementioning

confidence: 94%

“…u + is the forecasting error of model k=asset, cm) Clark and McCracken (2001) argue that when forecasting models are nested, many of the standard test statistics (including the HLNh test) are no longer asymptotically Gaussian, as the forecast errors are asymptotically the same and thus perfectly correlated. They provide an alternative test for nested models, called the ENC-T test.…”

Section: Measuring Model Forecast Performancementioning

confidence: 99%

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The Role of Asset Prices in Forecasting Inflation and Output in South Africa

Gupta

Hartley

2013

Journal of Emerging Market Finance

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This paper assesses the predictive ability of asset prices relative to other variables in forecasting inflation and real GDP growth in South Africa. A total of 42 asset and non-asset predictor variables are considered. Forecasts of inflation and real GDP growth are computed using both individual predictor autoregressive distributed lag (ARDL) models, forecast combination approaches, as well as, large scale models. The large scale data models considered include Bayesian vector autoregressive models, and classical and Bayesian univariate and multivariate factor augmented vector autoregressive models. The models are estimated for an in-sample of 1980:Q2 to 1999:Q4, and then one-to eight step-ahead forecasts for inflation and real GDP growth are evaluated over the 2000:Q1 to 2010:Q2 out-of-sample period. Principle Component forecast combination models are found to produce the most accurate out-of-sample forecasts of inflation and real GDP growth relative to the other combination and more sophisticated models considered. Asset prices are found to contain particularly useful information for forecasting inflation and real GDP growth at certain horizons. Asset prices are however found to be stronger predictors of inflation, particularly in the long run.

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Section: Measuring Model Forecast Performancementioning

confidence: 94%

Section: Measuring Model Forecast Performancementioning

confidence: 99%

The Role of Asset Prices in Forecasting Inflation and Output in South Africa

Gupta

Hartley

2013

Journal of Emerging Market Finance

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“…In practice, it is likely that only the outcomes Clark and McCracken (2001) are useful to evaluate the quality of the forecasts.…”

Section: Methodsmentioning

confidence: 99%

Are forecast updates progressive?

Chang¹,

Franses²,

McAleer³

2013

Mathematics and Computers in Simulation

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Many macro-economic forecasts and forecast updates, such as those from the IMF and OECD, typically involve both a model component, which is replicable, as well as intuition (namely, expert knowledge possessed by a forecaster), which is non-replicable. . Learning from previous mistakes can affect both the replicable component of a model as well as intuition. If learning, and hence forecast updates, are progressive, forecast updates should generally become more accurate as the actual value is approached. Otherwise, learning and forecast updates would be neutral. The paper proposes a methodology to test whether macro-economic forecast updates are progressive, where the interaction between model and intuition is explicitly taken into account. The data set for the empirical analysis is for Taiwan, where we have three decades of quarterly data available of forecasts and their updates of two economic fundamentals, namely the inflation rate and real GDP growth rate. The empirical results suggest that the forecast updates for Taiwan are progressive, and that progress can be explained predominantly by improved intuition.

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“…We used Theil's U statistic, the MSE-F test developed by McCracken (2004), and the ENC-NEW test developed by Clark and McCracken (2001) In order to implement the MSE-F and the ENC-NEW tests, we followed Lettau and Ludvigson (2001) and defined two benchmark models. The first benchmark model is an autoregressive model.…”

Section: Out-of-sample Tests Of Predictability Of Stock Returnsmentioning

confidence: 99%

International equity flows and the predictability of US stock returns

Hartmann

Pierdzioch

2007

Journal of Forecasting

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We examined the link between international equity flows and U.S. stock returns. Based on the results of tests of in-sample and out-of-sample predictability of stock returns, we found evidence of a strong positive (negative) link between international equity flows and contemporaneous (one-month-ahead) stock returns. Our results also indicate that an investor, in real time, could have used information on the link between international equity flows and one-month-ahead stock returns to improve the performance of simple trading rules.Keywords: International equity flows, predictability of stock returns, performance of trading rules, the United States IntroductionA key manifestation of the globalization of the world's economy and the international integration of financial markets is the significant increase in international capital flows since the mid-1990s. Much of the increase in international capital flows has been due to cross-border financial flows in equities (Eichengreen and Fishlow 1998). The increasing importance of international equity flows has spurred the interest of researchers in the question whether international equity flows affect stock returns. International equity flows may affect stock returns through momentum trading of foreign investors, pricepressure and liquidity effects, a potential broadening in the investor base, and changes in the cost of capital (see Stulz 1999, for a survey). Empirical evidence for a link between stock returns and international equity flows has been reported by Brennan and Cao (1997), Froot et al. (2001), and Bekeart et al. (2002, to name just a few.Interesting and yet unanswered questions are whether international equity flows help to predict stock returns, and how much an investor can gain from accounting for the link between international equity flows and stock returns. We provide answers to these questions by analyzing the implications of international equity flows for the predictability of stock returns. We used in-sample tests, outof-sample tests, and the recursive modeling approach developed by Timmermann (1995, 2000) to study whether international equity flows help to forecast stock returns. on international equity flows to set up profitable trading rules, and for markettiming purposes.We organize the remainder of this paper as follows. In Section 2, we lay out the data on international equity flows, the stock-market data, and the other macroeconomic and financial data we used in our empirical analyses. In Section 3, we report the results of in-sample and out-of-sample tests of stock-return predictability based on international equity flows. In Section 4, we describe our recursive modeling approach and how we analyzed the performance of trading rules in real time. Furthermore, we present the results of implementing the recursive modeling approach, and we report the results of tests of market timing.In Section 5, we offer some concluding remarks. The DataOur source of monthly data on net international equity flows to the United States is the U.S. Treas...

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Tests of equal forecast accuracy and encompassing for nested models

Cited by 943 publications

References 48 publications

The Role of Asset Prices in Forecasting Inflation and Output in South Africa

The Role of Asset Prices in Forecasting Inflation and Output in South Africa

Are forecast updates progressive?

International equity flows and the predictability of US stock returns

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