Measuring Predictability: Theory and Macroeconomic Applications
NBER Technical Working Paper No. 213
We propose a measure of predictability based on the ratio of the expected loss of a short-run forecast to the expected loss of a long-run forecast. This predictability measure can be tailored to the forecast horizons of interest, and it allows for general loss functions, univariate or multivariate information sets, and stationary or nonstationary data. We propose a simple estimator, and we suggest resampling methods for inference. We then provide several macroeconomic applications. First, based on fitted parametric models, we assess the predictability of a variety of macroeconomic series. Second, we analyze the internal propagation mechanism of a standard dynamic macroeconomic model by comparing predictability of model inputs and model outputs. Third, we use predictability as a metric for assessing the similarity of data simulated from the model and actual data. Finally, we sketch several promising directions for future research.
Published: Diebold, Franics S. and Lutz Kilian. "Measuring Predictability: Theory And Macroeconomic Applications," Jouranl of Applied Econometrics, 2001, v16(6), 657-669.