Kim, Hyeongwoo and Durmaz, Nazif (2009): Bias Correction and Out-of-Sample Forecast Accuracy.
Download (476kB) | Preview
The least squares (LS) estimator suffers from signicant downward bias in autoregressive models that include an intercept. By construction, the LS estimator yields the best in-sample fit among a class of linear estimators notwithstanding its bias. Then, why do we need to correct for the bias? To answer this question, we evaluate the usefulness of the two popular bias correction methods, proposed by Hansen (1999) and So and Shin (1999), by comparing their out-of-sample forecast performances with that of the LS estimator. We find that bias-corrected estimators overall outperform the LS estimator. Especially, Hansen's grid bootstrap estimator combined with a rolling window method performs the best.
|Item Type:||MPRA Paper|
|Original Title:||Bias Correction and Out-of-Sample Forecast Accuracy|
|Keywords:||Small-Sample Bias; Grid Bootstrap; Recursive Mean Adjustment; Out-of-Sample Forecast; Diebold-Mariano Test|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods; Simulation Methods|
|Depositing User:||Dr. Hyeongwoo Kim|
|Date Deposited:||14. Aug 2009 06:06|
|Last Modified:||14. Feb 2014 09:17|
Andrews, D. W. K. (1993): "Exactly Median-Unbiased Estimation of First Order Autoregressive Unit Root Models," Econometrica, 61, 139-165.
Andrews, D. W. K., and H.-Y. Chen (1994): "Approximately Median-Unbiased Estimation of Autoregressive Models," Journal of Business and Economic Statistics, 12, 187-204.
Andrews, D. W. K., and J. C. Monahan (1992): "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Econometrica, 60, 953-966.
Choi, C.-Y., N. C. Mark, and D. Sul (2008): "Bias Reduction in Dynamic Panel Data Models by Common Recursive Mean Adjustment," manuscript.
Cook, S. (2002): "Correcting Size Distortion of the Dickey-Fuller Test via Recursive Mean Adjustment," Statistics and Probability Letters, 60, 75-79.
Diebold, F. X., and R. S. Mariano (1995): "Comparing Predictive Accuracy," Journal of Business and Economic Statistics, 13, 253-263.
Hansen, B. E. (1999): "The Grid Bootstrap and the Autoregressive Model," Review of Economics and Statistics, 81, 594-607.
Karanasos, M., S. H. Sekioua, and N. Zeng (2006): "On the Order of Integration of Monthly US Ex-ante and Ex-post Real Interest Rates: New Evidence from over a Century of Data," Economics Letters, 90, 163-169.
Kendall, M. G. (1954): "Note on Bias in the Estimation of Autocorrelation," Biometrika, 41, 403-404.
Kim, H., and M. Ogaki (2009): "Purchasing Power Parity and the Taylor Rule," Ohio State University Department of Economics Working Paper No. 09-03.
Murray, C. J., and D. H. Papell (2002): "The Purchasing Power Parity Persistence Paradigm," Journal of International Economics, 56, 1-19.
Ng, S., and P. Perron (2001): "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, 69, 1519-1554.
So, B. S., and D. W. Shin (1999): "Recursive Mean Adjustment in Time-Series Inferences," Statistics and Probability Letters, 43, 65-73.
Steinsson, J. (2008): "The Dynamic Behavior of the Real Exchange Rate in Sticky-Price Models," American Economic Review, 98, 519-533.
Sul, D., P. C. B. Phillips, and C.-Y. Choi (2005): "Prewhitening Bias in HAC Estimation," Oxford Bulletin of Economics and Statistics, 67, 517-546.
Taylor, A. M. (2001): "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specication Biases in Mean-Reversion Tests of the Law of One Price," Econometrica, 69, 473-498.
Taylor, R. (2002): "Regression-Based Unit Root Tests with Recursive Mean Adjustment for Seasonal and Nonseasonal Time Series," Journal of Business and Economic Statistics, 20, 269-281.