Journal Article

The Model Confidence Set

Nason, James M., Hansen, Peter R., Lunde, Asger

2011

Overview

This paper introduces the model confidence set (MCS) and applies it to the selection of models. A MCS is a set of models that is constructed such that it will contain the best model with a given level of confidence. The MCS is in this sense analogous to a confidence interval for a parameter. The MCS acknowledges the limitations of the data, such that uninformative data yield a MCS with many models, whereas informative data yield a MCS with only a few models. The MCS procedure does not assume that a particular model is the true model; in fact, the MCS procedure can be used to compare more general objects, beyond the comparison of models. We apply the MCS procedure to two empirical problems. First, we revisit the inflation forecasting problem posed by Stock and Watson (1999), and compute the MCS for their set of inflation forecasts. Second, we compare a number of Taylor rule regressions and determine the MCS of the best regression in terms of in-sample likelihood criteria.

• Publisher: Blackwell Publishing Ltd,Econometric Society,Wiley-Blackwell
• Subject: Applications / Bootstrap-Verfahren / Confidence / Confidence intervals / Confidence sets / Data / Distribution / Econometrics / Economic forecasting / Economic forecasting models / Economic models / Estimation / Exact sciences and technology / Forecasting / Forecasting models / Inference from stochastic processes; time series analysis / Inflation / Inflation rate / Inflation rates / Insurance, economics, finance / Mathematics / Model confidence set / model selection / Model testing / Modeling / Modellierung / multiple comparisons / Nonparametric inference / Null hypothesis / P values / Parameter estimation / Parametric inference / Probability and statistics / Probability theory / Prognoseverfahren / Regression analysis / Rules / Sciences and techniques of general use / Significance tests / Statistical forecasts / Statistical models / Statistics / Statistischer Test / Studies / Taylor rule / Theorie