Forecast evaluation tests and negative long-run variance estimates in small samples

Harvey, David I. and Leybourne, Stephen J. and Whitehouse, Emily J. (2017) Forecast evaluation tests and negative long-run variance estimates in small samples. International Journal of Forecasting, 33 (4). pp. 833-847. ISSN 0169-2070

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Abstract

In this paper, we show that when computing standard Diebold-Mariano-type tests for equal forecast accuracy and forecast encompassing, the long-run variance can frequently be negative when dealing with multi-step-ahead predictions in small, but empirically relevant, sample sizes. We subsequently consider a number of alternative approaches to dealing with this problem, including direct inference in the problem cases and use of long-run variance estimators that guarantee positivity. The finite sample size and power of the different approaches are evaluated using extensive Monte Carlo simulation exercises. Overall, for multi-step-ahead forecasts, we find that the recently proposed Coroneo and Iacone (2016) test, which is based on a weighted periodogram long-run variance estimator, offers the best finite sample size and power performance.

Item Type: Article
Keywords: Forecast evaluation; Long-run variance estimation; Simulation; Diebold-Mariano test; Forecasting
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
Identification Number: 10.1016/j.ijforecast.2017.05.001
Depositing User: Eprints, Support
Date Deposited: 23 May 2017 08:19
Last Modified: 17 Jun 2017 14:31
URI: http://eprints.nottingham.ac.uk/id/eprint/43017

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