Summary
Tests for parameter constancy and the ability to encompass rival models are important parts of model evaluation. It is shown that the recently proposed forecast-encompassing test statistics have implicit null hypotheses that combine hypotheses of parameter constancy and complete parametric encompassing. An additional attraction of these tests is that they are easily calculated even for large-scale econometric models. However, just as minimum MSE is a necessary, but not sufficient, condition for model congruence, so the requirement that one model forecast variance-encompass another is a necessary condition for the first model to have constant parameters and encompass the other model.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Akaike, H. (1973), Information theory and an extension of the maximum likelihood principle, pp. 267–281 in B.N. Petrov and F. Csaki (eds.), 2nd International Symposium on Information Theory. Budapest: Akademiai Kiado.
Anderson, G.J. and Mizon, G.E. (1983), Parameter constancy tests: Old and new. Discussion Paper in Economics and Econometrics, No. 8325, Southampton University, forthcoming in Oxford Bulletin of Economics and Statistics.
Anderson, G.J. and Mizon, G.E. (1989), What can statistics contribute to the analysis of economic structural change? pp. 3–21 in P. Hackl (ed.), Statistical Analysis and Forecasting of Economic Structural Change. Berlin: Springer-Verlag.
Andrews, D.F. and Fair, R.C. (1988), Inference in nonlinear econometric models with structural change. Review of Economic Studies, 55, 615–640.
Baillie, R.T. (1979), The asymptotic mean squared error of multistep prediction from the regression model with autoregressive errors. Journal of the American Statistical Association, 47, 175–184.
Chong, Y.Y. and Hendry, D.F. (1986), Econometric evaluation of linear macro-economic models. Review of Economic Studies, 53, 671–690.
Chow, G.C. (1960), Tests of equality between sets of coefficients in two linear regressions. Econometrica, 28, 591–605.
Cox, D.R. (1961), Tests of separate families of hypotheses, pp. 105–123 in Proceedings of the Fourth Berkeley Symposium on Mathematical Statistics and Probability, Volume1. Berkeley: University of California Press.
Davidson, R. and MacKinnon, J.G. (1981), Several tests for model specification in the presence of alternative hypotheses. Econometrica, 49, 781–793.
Engle, R.F. (1982), Autoregressive conditional heteroscedasticity, with estimates of the variance of the United Kingdom inflation. Econometrica, 50, 987–1008.
Ericsson, N.R. (1988), Parameter constancy, mean squared forecast errors, and measuring forecast performance: An exposition. Mimeo.
Ericsson, N.R. and Marquez, J.R. (1989), Exact and approximate multi-period mean square forecast errors for dynamic econometric models. International Finance Discussion Papers No. 348, Board of Governors of the Federal Reserve System.
Fair, R.C. (1985), Evaluating the predictive accuracy of models, chapter 33 in Z. Griliches and M.D. Intriligator (eds.), The Handbook of Econometrics. Amsterdam: North-Holland.
Hannan, E.J. and Quinn, B.G. (1979), The determination of the order of an autoregression. Journal of the Royal Statistical Society, B-41, 190–195.
Harvey, A.C. (1981), The Econometric Analysis of Time Series. Oxford: Philip Allan.
Hendry, D.F. (1974), Stochastic specification in an aggregate demand model of the United Kingdom. Econometrica, 42, 559–578.
Hendry, D.F. (1979), Predictive failure and econometric modelling in macroeconomics: The transactions demand for money, pp. 217–242 in P.A. Ormerod (ed.), Economic Modelling. London: Heinemann Education Books.
Hendry, D.F. (1987), Econometric methodology: A personal perspective, chapter 10 in T.F. Bewley (ed.), Advances in Econometrics. Cambridge: Cambridge University Press.
Hendry, D.F. (1988), The encompassing implications of feedback versus feedforward mechanisms in econometrics. Oxford Economic Papers, 40, 132–149.
Hendry, D.F. (1989), PC-GIVE: An interactive econometric modelling system (version 6.0). Institute of Economics and Statistics, University of Oxford.
Hendry, D.F. and Mizon, G.E. (1990), Procrustean econometrics: Or stretching and squeezing the data, in C.W.J. Granger (ed.), Modeling Economic Series. Readings in Econometric Methodology. Oxford: Oxford University Press.
Hendry, D.F. and Richard, J.-F. (1982), On the formulation of empirical models in dynamic econometrics. Journal of Econometrics, 20, 3–33.
Hendry, D.F. and Richard, J.-F. (1987), Recent developments in the theory of encompassing, in B. Cornet and H. Tulkens (eds.), Contributions to Operations Research and Econometrics. The XXth Anniversary of CORE. Cambridge: MIT Press.
Kiviet, J.F. (1986), On the rigour of some misspecification tests for modelling dynamic relationships. Review of Economic Studies, 53, 241–261.
Mallows, C.L. (1973), Some comments on C p . Technometrics, 15, 661–676.
Mariano, R.S. and Brown, B.W. (1983), Prediction-based tests for misspecification in non-linear simultaneous systems, in S. Karlin, T. Amemiya and L. Goodman (eds.), Studies in Econometrics, Time Series and Multivariate Statistics. Orlando: Academic Press.
Mizon, G.E. (1984), The encompassing approach in econometrics, pp. 135–172 in D.F. Hendry and K.F. Wallis (eds.), Econometrics and Quantitative Economics. Oxford: Basil Black well.
Mizon, G.E. and Richard, J.-F. (1986), The encompassing principle and its application to testing non-nested hypotheses. Econometrica, 54, 657–678.
Pagan, A. (1989), On the role of simulation in the statistical evaluation of economic models. Journal of Econometrics, 40, 125–139.
Pesaran, M.H. and Smith, R.P. (1985), Evaluation of macroeconometric models. Economic Modelling, 2, 125–134.
Phillips, G.D.A. and McCabe, B.P. (1983), The independence of tests for structural change in regression models. Economics Letters, 12, 283–287.
Pindyck, R.S. and Rubinfeld, D.L. (1981), Econometric Models and Economic Forecasts, 2nd edition. New York: McGraw-Hill.
Schmidt, P. (1974), The asymptotic distribution of forecasts in the dynamic simulation of an econometric model. Econometrica, 42, 303–309.
Schwarz, G. (1978), Estimating the dimension of a model. The Annals of Statistics, 6, 461–464.
Wallis, K.F. (1989), Macroeconomic forecasting: A survey. Economic Journal, 99, 28–61.
Wallis, K.F. et al. (1984, 1985, 1986, 1987), Models of the UK economy, Annual Reviews by the ESRC Macroeconomic Modelling Bureau. Oxford: Oxford University Press.
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 1991 Springer-Verlag Berlin Heidelberg
About this paper
Cite this paper
Lu, M., Mizon, G.E. (1991). Forecast Encompassing and Model Evaluation. In: Hackl, P., Westlund, A.H. (eds) Economic Structural Change. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-06824-3_9
Download citation
DOI: https://doi.org/10.1007/978-3-662-06824-3_9
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-662-06826-7
Online ISBN: 978-3-662-06824-3
eBook Packages: Springer Book Archive