02432cam a22002897 4500001000600000003000500006005001700011008004100028100002100069245013300090260006600223490005100289500001700340520089400357530006101251538007201312538003601384690017001420690011001590690010101700690012301801700001701924710004201941830008601983856003702069856003602106t0326NBER20161026162050.0161026s2006 mau||||fs|||| 000 0 eng d1 aWest, Kenneth D.10aApproximately Normal Tests for Equal Predictive Accuracy in Nested Modelsh[electronic resource] /cKenneth D. West, Todd Clark. aCambridge, Mass.bNational Bureau of Economic Researchc2006.1 aNBER technical working paper seriesvno. t0326 aAugust 2006.3 aForecast evaluation often compares a parsimonious null model to a larger model that nests the null model. Under the null that the parsimonious model generates the data, the larger model introduces noise into its forecasts by estimating parameters whose population values are zero. We observe that the mean squared prediction error (MSPE) from the parsimonious model is therefore expected to be smaller than that of the larger model. We describe how to adjust MSPEs to account for this noise. We propose applying standard methods (West (1996)) to test whether the adjusted mean squared error difference is zero. We refer to nonstandard limiting distributions derived in Clark and McCracken (2001, 2005a) to argue that use of standard normal critical values will yield actual sizes close to, but a little less than, nominal size. Simulation evidence supports our recommended procedure. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aC22 - Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes2Journal of Economic Literature class. 7aC53 - Forecasting and Prediction Methods • Simulation Methods2Journal of Economic Literature class. 7aE17 - Forecasting and Simulation: Models and Applications2Journal of Economic Literature class. 7aF37 - International Finance Forecasting and Simulation: Models and Applications2Journal of Economic Literature class.1 aClark, Todd.2 aNational Bureau of Economic Research. 0aTechnical Working Paper Series (National Bureau of Economic Research)vno. t0326.4 uhttp://www.nber.org/papers/t032641uhttp://dx.doi.org/10.3386/t0326