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A likelihood ratio and Markov Chain based method to evaluate density forecasting

Li, Yushu; Andersson, Jonas
Working paper
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http://hdl.handle.net/11250/194977
Issue date
2014-03
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  • Discussion papers (FOR) [493]
Abstract
In this paper, we propose a likelihood ratio and Markov chain based method to

evaluate density forecasting. This method can jointly evaluate the unconditional forecasted

distribution and dependence of the outcomes. This method is an extension of the widely

applied evaluation method for interval forecasting proposed by Christoffersen (1998). It is

also a more refined approach than the pure contingency table based density forecasting

method in Wallis (2003). We show that our method has very high power against incorrect

forecasting distributions and dependence. Moreover, the straightforwardness and ease of

application of this joint test provide a high potentiality for further applications in both

financial and economical areas.
Publisher
FOR
Series
Discussion paper;12/14

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