DP8542 Out-of-Sample Forecast Tests Robust to the Choice of Window Size

Author(s): Atsushi Inoue, Barbara Rossi
Publication Date: August 2011
Keyword(s): estimation window, forecast evaluation, predictive ability testing
JEL(s): C22, C52, C53
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8542

This paper proposes new methodologies for evaluating out-of-sample forecasting performance that are robust to the choice of the estimation window size. The methodologies involve evaluating the predictive ability of forecasting models over a wide range of window sizes. We show that the tests proposed in the literature may lack the power to detect predictive ability and might be subject to data snooping across different window sizes if used repeatedly. An empirical application shows the usefulness of the methodologies for evaluating exchange rate models' forecasting ability.