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The power of tests of predictive ability in the presence of structural breaks

Authors :
Clark, Todd E.
McCracken, Michael W.
Source :
Journal of Econometrics. Jan, 2005, Vol. 124 Issue 1, p1, 31 p.
Publication Year :
2005

Abstract

This paper presents analytical, Monte Carlo, and empirical evidence on the effects of structural breaks on tests for equal forecast accuracy and encompassing. We show that out-of-sample predictive content can be hard to find because out-of-sample tests are highly dependent on the timing of the predictive ability. Moreover, predictive content is harder to find with some tests than others: in power, F-type tests of equal forecast accuracy and encompassing often dominate t-type alternatives. Based on these results and evidence from an empirical application, we conclude that structural breaks under the alternative may explain why researchers often find evidence of in-sample, but not out-of-sample, predictive content. JEL classification: C53; C12; C52 Keywords: Power: Forecast evaluation: Granger causality; Model selection

Details

Language :
English
ISSN :
03044076
Volume :
124
Issue :
1
Database :
Gale General OneFile
Journal :
Journal of Econometrics
Publication Type :
Academic Journal
Accession number :
edsgcl.126388270