A Kolmogorov-Smirnov Based Test for Comparing the Predictive Accuracy of Two Sets of Forecasts.

Hassani, H. and Silva, E., 2015. A Kolmogorov-Smirnov Based Test for Comparing the Predictive Accuracy of Two Sets of Forecasts. Econometrics, 3 (3), 590 - 609 .

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DOI: 10.3390/econometrics3030590

Abstract

This paper introduces a complement statistical test for distinguishing between the predictive accuracy of two sets of forecasts. We propose a non-parametric test founded upon the principles of the Kolmogorov-Smirnov (KS) test, referred to as the KS Predictive Accuracy (KSPA) test. The KSPA test is able to serve two distinct purposes. Initially, the test seeks to determine whether there exists a statistically significant difference between the distribution of forecast errors, and secondly it exploits the principles of stochastic dominance to determine whether the forecasts with the lower error also reports a stochastically smaller error than forecasts from a competing model, and thereby enables distinguishing between the predictive accuracy of forecasts. We perform a simulation study for the size and power of the proposed test and report the results for different noise distributions, sample sizes and forecasting horizons. The simulation results indicate that the KSPA test is correctly sized, and robust in the face of varying forecasting horizons and sample sizes along with significant accuracy gains reported especially in the case of small sample sizes. Real world applications are also considered to illustrate the applicability of the proposed KSPA test in practice.

Item Type:Article
ISSN:2225-1146
Uncontrolled Keywords:Forecast Accuracy ; Predictive Accuracy ; Kolmogorov-Smirnov ; Stochastic Dominance ; Diebold-Mariano ; Non-parametric
Subjects:UNSPECIFIED
Group:Business School
ID Code:22326
Deposited By: Unnamed user with email symplectic@symplectic
Deposited On:04 Aug 2015 15:31
Last Modified:04 Aug 2015 15:31

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