Ch 12 - Forecast comparison and combination

Question 1

Why will just about any model be mis-specified or sub-optimal in economics and finance?

Answer 1

We can only observe one history for a given economy, and the agents within it are constantly changing their behavior and so changing the behavior of economic variables

Question 2

What is a Diebold-Mariano test?

Answer 2

A test for statistical accuracy of 2 forecasts, in which the avg loss incurred from using 2 forecasts is compared

Question 3

What is forecasting encompassing?

Answer 3

One forecast contains all the information that another forecast has, or possibly more

Question 4

How do you test for encompassing?

Answer 4

Running a regression of the target variable on the 2 forecasts