2023/12/26 by Jean‐Yves Pitarakis, Pitarakis, Jean-Yves · 1 citation
Economics, Econometrics and Finance · #Climate Change Policy and Economics #Econometrics (econ.EM) #FOS: Economics and business #Market Dynamics and Volatility #Monetary Policy and Economic Impact
paper · pdf · doi:10.48550/arxiv.2312.16099
openalex publication_date 2023/12/26 · openalex created_date 2023/12/29 · openalex updated_date 2026/07/28
We introduce a novel approach for comparing out-of-sample multi-step forecasts obtained from a pair of nested models that is based on the forecast encompassing principle. Our proposed approach relies on an alternative way of testing the population moment restriction implied by the forecast encompassing principle and that links the forecast errors from the two competing models in a particular way. Its key advantage is that it is able to bypass the variance degeneracy problem afflicting model based forecast comparisons across nested models. It results in a test statistic whose limiting distribution is standard normal and which is particularly simple to construct and can accommodate both single period and longer-horizon prediction comparisons. Inferences are also shown to be robust to different predictor types, including stationary, highly-persistent and purely deterministic processes. Finally, we illustrate the use of our proposed approach through an empirical application that explores the role of global inflation in enhancing individual country specific inflation forecasts.