This paper describes a new test for evaluating conditional density functions that remains valid when the data are time-dependent and that is therefore applicable to forecasting problems. We show that the test statistic is asymptotically distributed standard normal under the null hypothesis, and diverges to infinity when the null hypothesis is false. We use a bootstrap algorithm to approximate the distribution of the test statistic in finite samples, and show that the bootstrapped distribution converges to the asymptotic distribution in probability. A Monte Carlo simulation study reveals that the bootstrap test works well and is highly robust to the value of the smoothing parameter in the kernel density estimator. An application to inflation forecasting is also presented to demonstrate the use of the test.

Also published as:

Journal of Econometrics (0304-4076)
August 2006. Vol.133, Iss.2, pp. 863-886