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Evaluating the Accuracy of Forecasts from Vector Autoregressions

The views expressed herein are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Cleveland, Federal Reserve Bank of St. Louis, Federal Reserve System, or any of its staff.

Abstract

This article surveys recent developments in the evaluation of point and density forecasts in the context of forecasts made by vector autoregressions. Specific emphasis is placed on highlighting those parts of the existing literature that are applicable to direct multistep forecasts and those parts that are applicable to iterated multistep forecasts. This literature includes advancements in the evaluation of forecasts in population (based on true, unknown model coefficients) and the evaluation of forecasts in the finite sample (based on estimated model coefficients). The article then examines in Monte Carlo experiments the finite-sample properties of some tests of equal forecast accuracy, focusing on the comparison of VAR forecasts to AR forecasts. These experiments show the tests to behave as should be expected given the theory. For example, using critical values obtained by bootstrap methods, tests of equal accuracy in population have empirical size about equal to nominal size.

Keywords

Acknowledgements

Acknowledgment

The authors gratefully acknowledged helpful comments from Lutz Kilian.

Citation

Clark, T.E. and McCracken, M.W. (2013), "Evaluating the Accuracy of Forecasts from Vector Autoregressions

The views expressed herein are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Cleveland, Federal Reserve Bank of St. Louis, Federal Reserve System, or any of its staff.

", VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims (Advances in Econometrics, Vol. 32), Emerald Group Publishing Limited, Leeds, pp. 117-168. https://doi.org/10.1108/S0731-9053(2013)0000031004

Publisher

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Emerald Group Publishing Limited

Copyright © 2013 Emerald Group Publishing Limited