1.

Model 1: ARIMA(0,1,[2]): Δ Spread=ϵ t −b 2 ϵ t−2

Model 2: ARIMA([2],1,[2,5]): Δ Spread=a2 Δ Spread t −2+ ϵ t + b2 ϵ t−2 +b 5 ϵ t−5
Model 1: ARIMA(0,1, Model 2: ARIMA([2],1,
[2]) [2,5])
Mean Absolute Error (MAE) 0.292 0.303
Root Mean Squared Error (RMSE) 0.395 0.387
Mean Absolute Percent Error 0.394 0.458
(MAPE)
Root Mean Percent Squared 0.508 0.596
Error (RMPSE)
The information in the above 4 rows shows that except for the root mean-squared
error, model 1 has better 1-step ahead forecasts than model 2.
Bias Test for 1-step ahead Errors F Sig=.180 F Sig. = .631
Note about bias test. The test results show that in both cases, the null of
non-biased forecasts cannot be rejected at any
reasonable level of significance.
Granger Newbold Test No sig difference.
DM /CW Use Clark-West because the ARIMA(0,1,[2]) is
nested in the ARIMA(2,1,[2,5]). The CW test
shows, after incorporating estimation error, that
the difference between model 2’s and Model 1’s
Mean Squared Error is only 1.21 standard errors
from 0. The p-vale (Sig) is .232. The null of no
difference can’t be rejected for any reasonable
level of significance.
Thiel U Stats
1-step 1.0510 1.0309
2-step 1.0356 0.9651
3-step 1.0335 0.9464
4-step 1.0446 0.9320
5-step 1.0365 0.8957
6-step 1.0231 0.8553
7-step 1.0145 0.8188
8-step 0.9951 0.7740
According to the Thiel U-Stats, Model 1 only outperforms the naïve (random-walk)
model in the 8th step-ahead forecast. Model 2 outperforms the naïve (random-walk)
model in all but the one-step ahead forecast.
Comparing the two models: Model 2’s U-Stats are lower (and therefore outperforms)
than Model 1’s in all cases..
2. In this exercise, I’ll choose Model 2 (ARIMA(2,1,[2,5]) from question 1’s horse race, and
compare it against and ARIMA(0,1,[2,5]) specification. The ARIMA(0,1,[2,5]) model will be
model 1.
Model 1: Δ Spread=ϵ t +b2 ϵ t −2+ b5 ϵ t−5
Model 1: ARIMA(0,1, Model 2: ARIMA([2],1,
[2,5]) [2,5])
Mean Absolute Error (MAE) 0.310 0.303
Root Mean Squared Error (RMSE) 0.407 0.387
Mean Absolute Percent Error 0.430 0.458
(MAPE)
Root Mean Percent Squared 0.535 0.596
Error (RMPSE)
The information in the above 4 rows shows that except for the root mean-squared
error, model 1 has better 1-step ahead forecasts than model 2.
Bias Test for 1-step ahead Errors F Sig=.307 F Sig. = .631
Note about bias test. The test results show that in both cases, the null of
non-biased forecasts cannot be rejected at any
reasonable level of significance.
Granger Newbold Test According to the Granger-Newbold test, the
ARIMA(0,1,[2,5]) model’s MSE is significantly
larger than Model 2’ for any level greater than .
035.
DM /CW Use Clark-West because the ARIMA(0,1,[2,5]) is
nested in the ARIMA(2,1,[2,5]). The CW test
shows, after incorporating estimation error, that
the difference between model 1’s and Model 2’s
Mean Squared Error is2.16 standard errors above
0. The p-vale (Sig) is .037. The null of no difference
can be rejected for any level of significance greater
than .037.
Thiel U Stats
1-step 1.0831 1.0309
2-step 1.0411 0.9651
3-step 1.0335 0.9464
4-step 1.0409 0.9320
5-step 1.0203 0.8957
6-step 0.9843 0.8553
7-step 0.9592 0.8188
8-step 0.9244 0.7740
According to the Thiel U-Stats, Model 1 only outperforms the naïve (random-walk)
model in the 6 to 8th step-ahead forecast. Model 2 outperforms the naïve (random-
walk) model in all but the one-step ahead forecast.
Comparing the two models: Model 2’s U-Stats are lower (and therefore outperforms)
 than Model 1’s in all cases.

In conclusion, Based on the various tests above, model 2 is better at forecasting than
model 1.

3. See next page.

Model 1: S pread=a0 +a 1 y t −1 +a 2 y t −2+ ϵ t + β 3 ϵ t −3
Model 1: ARIMA(2,0, Model 2: ARIMA([2],1,
[3]) [2,5])
Mean Absolute Error (MAE) 0.321 0.303
Root Mean Squared Error (RMSE) 0.381 0.387
Mean Absolute Percent Error 0.597 0.458
(MAPE)
Root Mean Percent Squared 0.905 0.596
Error (RMPSE)
The information in the above 4 rows shows that except for the root mean-squared
error, model 1 has better 1-step ahead forecasts than model 2.
Bias Test for 1-step ahead Errors F Sig=.558 F Sig. = .631
Note about bias test. The test results show that in both cases, the null of
non-biased forecasts cannot be rejected at any
reasonable level of significance.
Granger Newbold Test According to the Granger-Newbold test, there is
no significant difference in the mean-squared
errors.
DM /CW Use Diebold Marian because the ARIMA(2,0,[3]) is
not nested in the ARIMA(2,1,[2,5]). The DW test
shows, no significant difference between the two
MSEs
Thiel U Stats
1-step 1.0142 1.0309
2-step 1.0085 0.9651
3-step 0.9774 0.9464
4-step 0.9641 0.9320
5-step 0.8990 0.8957
6-step 0.8371 0.8553
7-step 0.7978 0.8188
8-step 0.7510 0.7740
According to the Thiel U-Stats, Model 1 outperforms the naïve (random-walk) model in
all but the 1-step and 2-step ahead forecasts. Model 2 outperforms the naïve
(random-walk) model in all but the one-step ahead forecast.
Comparing the two models: Model 2’s U-Stats are lower (and therefore outperforms)
than Model 1’s for the 2-step through 5-step ahead forecasts. Model 1 outperforms
model 2 in the 1-step, and 6th through 8th step ahead forecasts.
In conclusion, it looks like it is almost a toss-up between model 1 and model 2.