{"title":"Correlation-based tests of predictability","authors":"Pablo Pincheira Brown, Nicolás Hardy","doi":"10.1002/for.3081","DOIUrl":null,"url":null,"abstract":"<p>In this paper, we propose a correlation-based test for the evaluation of two competing forecasts. Under the null hypothesis of equal correlations with the target variable, we derive the asymptotic distribution of our test using the Delta method. This null hypothesis is not necessarily equivalent to the null of equal Mean Squared Prediction Errors (MSPE). Specifically, it might be the case that the forecast displaying the lowest MSPE also exhibits the lowest correlation with the target variable: this is known as “The MSPE paradox.” In this sense, our approach should be seen as complementary to traditional tests of equality in MSPE. Monte Carlo simulations indicate that our test has good size and power. Finally, we illustrate the use of our test in an empirical exercise in which we compare two different inflation forecasts for a sample of OECD economies. We find more rejections of the null of equal correlations than rejections of the null of equality in MSPE.</p>","PeriodicalId":47835,"journal":{"name":"Journal of Forecasting","volume":null,"pages":null},"PeriodicalIF":3.4000,"publicationDate":"2024-03-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Forecasting","FirstCategoryId":"96","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1002/for.3081","RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
In this paper, we propose a correlation-based test for the evaluation of two competing forecasts. Under the null hypothesis of equal correlations with the target variable, we derive the asymptotic distribution of our test using the Delta method. This null hypothesis is not necessarily equivalent to the null of equal Mean Squared Prediction Errors (MSPE). Specifically, it might be the case that the forecast displaying the lowest MSPE also exhibits the lowest correlation with the target variable: this is known as “The MSPE paradox.” In this sense, our approach should be seen as complementary to traditional tests of equality in MSPE. Monte Carlo simulations indicate that our test has good size and power. Finally, we illustrate the use of our test in an empirical exercise in which we compare two different inflation forecasts for a sample of OECD economies. We find more rejections of the null of equal correlations than rejections of the null of equality in MSPE.
期刊介绍:
The Journal of Forecasting is an international journal that publishes refereed papers on forecasting. It is multidisciplinary, welcoming papers dealing with any aspect of forecasting: theoretical, practical, computational and methodological. A broad interpretation of the topic is taken with approaches from various subject areas, such as statistics, economics, psychology, systems engineering and social sciences, all encouraged. Furthermore, the Journal welcomes a wide diversity of applications in such fields as business, government, technology and the environment. Of particular interest are papers dealing with modelling issues and the relationship of forecasting systems to decision-making processes.