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Forecast encompassing tests and probability forecasts

✍ Scribed by Michael P. Clements; David I. Harvey

Book ID
102291836
Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
267 KB
Volume
25
Category
Article
ISSN
0883-7252

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✦ Synopsis

Abstract

We consider tests of forecast encompassing for probability forecasts, for both quadratic and logarithmic scoring rules. We propose test statistics for the null of forecast encompassing, present the limiting distributions of the test statistics, and investigate the impact of estimating the forecasting models' parameters on these distributions. The small‐sample performance is investigated, in terms of small numbers of forecasts and model estimation sample sizes. We show the usefulness of the tests for the evaluation of recession probability forecasts from logit models with different leading indicators as explanatory variables, and for evaluating survey‐based probability forecasts. Copyright Β© 2009 John Wiley & Sons, Ltd.

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## Abstract This paper proposes an algorithm that uses forecast encompassing tests for combining forecasts when there are a large number of forecasts that might enter the combination. The algorithm excludes a forecast from the combination if it is encompassed by another forecast. To assess the usef