Working Paper

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

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;

JEL Classification: C53; C12; C52;

https://doi.org/10.20955/wp.2020.050

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2020-12-18

Number: 2020-050