TY  - JOUR
AU  - Hubrich,Kirstin
AU  - West,Kenneth D.
TI  - Forecast Evaluation of Small Nested Model Sets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14601
PY  - 2008
Y2  - December 2008
UR  - http://www.nber.org/papers/w14601
L1  - http://www.nber.org/papers/w14601.pdf
N1  - Author contact info:
Kirstin Hubrich
European Central Bank
Research Department
Kaiserstrasse 29
60311 Frankfurt am Main
Germany
E-Mail: kirstin.hubrich@ecb.int

Kenneth D. West
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706
Tel: 608/262-0033
Fax: 608/262-2033
E-Mail: kdwest@wisc.edu
AB  - We propose two new procedures for comparing the mean squared prediction error (MSPE) of a benchmark model to the MSPEs of a small set of alternative models that nest the benchmark.  Our procedures compare the benchmark to all the alternative models simultaneously rather than sequentially, and do not require reestimation of models as part of a bootstrap procedure.  Both procedures adjust MSPE differences in accordance with Clark and West (2007); one procedure then examines the maximum t-statistic, the other computes a chi-squared statistic.  Our simulations examine the proposed procedures and two existing procedures that do not adjust the MSPE differences: a chi-squared statistic, and White's (2000) reality check.  In these simulations, the two statistics that adjust MSPE differences have most accurate size, and the procedure that looks at the maximum t-statistic has best power.  We illustrate our procedures by comparing forecasts of different models for U.S. inflation.
ER  -