Working Paper

Tests of Conditional Predictive Ability: Some Simulation Evidence

Abstract: In this note we provide simulation evidence on the size and power of tests of predictive ability described in Giacomini and White (2006). Our goals are modest but non-trivial. First, we establish that there exist data generating processes that satisfy the null hypotheses of equal finite-sample (un)conditional predictive ability. We then consider various parameterizations of these DGPs as a means of evaluating the size and power properties of the proposed tests. While some of our results reinforce those in Giacomini and White (2006), others do not. We recommend against using the fixed scheme when conducting these tests and provide evidence that very large bandwidths are sometimes required when estimating long-run variances.

Keywords: prediction; out-of-sample; inference;

JEL Classification: C12; C52; C53;

https://doi.org/10.20955/wp.2019.011

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2019-03-01

Number: 2019-11

Pages: 19 pages