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Comparing Predictive Accuracy in the Presence of a Loss Function Shape Parameter

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  • Sander Barendse
  • Andrew J. Patton

Abstract

We develop tests for out-of-sample forecast comparisons based on loss functions that contain shape parameters. Examples include comparisons using average utility across a range of values for the level of risk aversion, comparisons of forecast accuracy using characteristics of a portfolio return across a range of values for the portfolio weight vector, and comparisons using a recently-proposed “Murphy diagrams†for classes of consistent scoring rules. An extensive Monte Carlo study verifies that our tests have good size and power properties in realistic sample sizes, particularly when compared with existing methods which break down when then number of values considered for the shape parameter grows. We present three empirical illustrations of the new test.

Suggested Citation

  • Sander Barendse & Andrew J. Patton, 2020. "Comparing Predictive Accuracy in the Presence of a Loss Function Shape Parameter," Economics Series Working Papers 909, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:909
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    Cited by:

    1. Lazar, Emese & Wang, Shixuan & Xue, Xiaohan, 2023. "Loss function-based change point detection in risk measures," European Journal of Operational Research, Elsevier, vol. 310(1), pages 415-431.
    2. Valentina Corradi & Sainan Jin & Norman R. Swanson, 2023. "Robust forecast superiority testing with an application to assessing pools of expert forecasters," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(4), pages 596-622, June.

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    More about this item

    Keywords

    Forecasting; model selection; out-of-sample testing; nuisance parameters;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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