World Conference Econometric Society, 2000, Seattle

Jeremy Berkowitz, Federal Reserve Board |

Testing the Accuracy of Density Forecasts |

Session: C-10-20 Tuesday 15 August 2000 by Berkowitz, Jeremy |

The forecast evaluation literature has traditionally focused on methods of assessing point forecasts. However, in the context of many models of financial risk, interest centers on more than just a single point of the forecast distribution. For example, value-at-risk (VaR) models which are currently in extremely wide use form interval forecasts. Many other important financial calculations also involve estimates not summarized by a point forecast. Although some techniques are currently available for assessing interval and density forecasts, existing methods tend to display low power in sample sizes typically available. This paper suggests a new approach to evaluating such forecasts. It requires evaluation of the entire forecast distribution, rather than a scalar or interval. The information content of forecast distributions combined with ex post realizations is enough to construct a powerful test even with sample sizes as small as 100. |

File created by Jurgen Doornik with eswc2000.ox on 2-01-2001