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I know that Mincer-Zarnowitz type of regressions are typically applied in a time series setting to evaluate forecasts. My question is whether the same type of regressions can be used in a cross sectional setting?

Say, my forecast of a variable for entity $i$ is $f_i$ and the realization of the variable is $a_i$. Does it make sense to run the following regression and conduct the joint test $\alpha=0$ and $\beta=1$?

\begin{equation} a_i = \alpha + \beta f_i + e_i \end{equation}

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I don't see anything wrong about this. However, note that you typically want the forecasts $f_i$ to be out-of-sample. Hence when estimating the forecasting models you should not use the observations $\{a_i\}$ which are later used to run the Mincer-Zarnowitz regression.

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  • $\begingroup$ Welcome! I've been wondering myself why out-of-sample evaluation methodology (such as MZ regressions, Diebold-Mariano tests, etc.) is common in time series applications (e.g. inflation or volatility forecasting) but rarely if ever applied in cross-section contexts (e.g. wage regressions or asset pricing). If this is only due to ``cultural'' reasons, then looking at these tools in cross-sections might be an interesting direction for further study. $\endgroup$ – Fabian Nov 28 '13 at 10:10

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