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Evaluating Density Forecasts

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  • Francis X. Diebold
  • Todd A. Gunther
  • Anthony S. Tay

Abstract

We propose methods for evaluating density forecasts. We focus primarily on methods that are applicable regardless of the particular user's loss function. We illustrate the methods with a detailed simulation example, and then we present an application to density forecasting of daily stock market returns. We discuss extensions for improving suboptimal density forecasts, multi-step-ahead density forecast evaluation, multivariate density forecast evaluation, monitoring for structural change and its relationship to density forecasting, and density forecast evaluation with known loss function.

Suggested Citation

  • Francis X. Diebold & Todd A. Gunther & Anthony S. Tay, 1997. "Evaluating Density Forecasts," Center for Financial Institutions Working Papers 97-37, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:97-37
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    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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