“Go Wild for a While!”: A New Test for Forecast Evaluation in Nested Models

Pablo Pincheira, Nicolás Hardy, Felipe Muñoz

Research output: Contribution to journalArticlepeer-review

7 Scopus citations


In this paper, we present a new asymptotically normal test for out-of-sample evaluation in nested models. Our approach is a simple modification of a traditional encompassing test that is commonly known as Clark and West test (CW). The key point of our strategy is to introduce an independent random variable that prevents the traditional CW test from becoming degenerate under the null hypothesis of equal predictive ability. Using the approach developed by West (1996), we show that in our test, the impact of parameter estimation uncertainty vanishes asymptotically. Using a variety of Monte Carlo simulations in iterated multi-step-ahead forecasts, we evaluated our test and CW in terms of size and power. These simulations reveal that our approach is reasonably well-sized, even at long horizons when CW may present severe size distortions. In terms of power, results were mixed but CW has an edge over our approach. Finally, we illustrate the use of our test with an empirical application in the context of the commodity currencies literature.

Original languageEnglish
Article number2254
Issue number18
StatePublished - Sep 2021
Externally publishedYes


  • Forecasting
  • Mean square prediction error
  • Out-of-sample
  • Prediction
  • Random walk


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