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Financial Variables and the Simulated Out‐of‐Sample Forecastability of U.S. Output Growth Since 1985: An Encompassing Approach
Author(s) -
Rapach David E.,
Weber Christian E.
Publication year - 2004
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1093/ei/cbh092
Subject(s) - econometrics , economics , metric (unit) , extant taxon , benchmark (surveying) , sample (material) , forecast error , autoregressive model , finance , statistics , mathematics , operations management , chemistry , geodesy , chromatography , evolutionary biology , biology , geography
We reconsider the out‐of‐sample forecasting ability of a large number of financial variables with respect to real output growth over the 1985:1–1999:4 period. We show that models including financial variables display almost no forecasting ability relative to an autoregressive benchmark model over this period according to a mean squared forecast error metric. However, tests based on forecast encompassing indicate that many financial variables do, in fact, contain information that is useful for forecasting real output growth over the 1985:1–1999:4 out‐of‐sample period. Our results suggest that the extant literature exaggerates the demise of the forecasting power of financial variables with respect to real activity since the mid‐1980s.