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Testing Predictive Ability and Power Robustification

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  • Kyungchul Song

Abstract

One of the approaches to compare forecasting methods is to test whether the risk from a benchmark prediction is smaller than the others. The test can be embedded into a general problem of testing inequality constraints using a one-sided sup functional. Hansen showed that such tests suffer from asymptotic bias. This article generalizes this observation, and proposes a hybrid method to robustify the power properties by coupling a one-sided sup test with a complementary test. The method can also be applied to testing stochastic dominance or moment inequalities. Simulation studies demonstrate that the new test performs well relative to the existing methods. For illustration, the new test was applied to analyze the forecastability of stock returns using technical indicators employed by White.

Suggested Citation

  • Kyungchul Song, 2011. "Testing Predictive Ability and Power Robustification," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(2), pages 288-296, October.
    • Handle: RePEc:taf:jnlbes:v:30:y:2011:i:2:p:288-296
    DOI: 10.1080/07350015.2012.663245
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    References listed on IDEAS

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