Out-of-sample R2 forecasting

[Filip Pierzgalski]

Hi everyone.

Im currently writing my thesis and got advised to compare In-sample vs Out-of-sample prediction. Where R2 out of sample is defined as:

My data set is for 1764 observations (months)

* Example generated by -dataex-. To install: ssc install dataex
dataex return t, count(30)
clear
input double return float t
 .01242389  1
 .02019115  2
 .02964644  3
 .03405454  4
 .02848361  5
-.01542547  6
-.00863808  7
 .01915629  8
 .01136751  9
-.05886838 10
 .03742423 11
  .0257288 12
 .02951672 13
 .00101633 14
 .04072984 15
 .03142682 16
-.00213872 17
-.00795212 18
-.00034236 19
-.00761387 20
-.01335902 21
 .01832136 22
-.00212152 23
 .03346823 24
 .01082923 25
 .01575765 26
-.01307993 27
-.00878622 28
 .01496919 29
-.01535528 30
end

The code that i tried to run, (by dividing data set 50/50 by training period and forecasting period).

gen t=_n
tsset t
gen segment = 1
replace segment = 0 if t<883
reg return L.return if segment ==0
predict forecast if segment == 1
gen returns = return if segment == 1 
reg return forecast

However, i am very new to STATA and would appreciate if someone could give me some feedback / suggestions on improvements.

[Phil Bromiley]

You could rewrite this as:

gen t=_n
tsset t
gen segment = (t >883 & t<.)
reg return L.return if segment ==0
predict forecast if segment == 1
reg return forecast if segment == 1

However, I'm not sure your regression is really what you have in the picture (note that we discourage pictures - I can't keep the picture open when I type here). It looks to me like you can use the formula directly with forecast to calculate the r-square. Remember, if you run

su return

then in r(mean) you'll have the mean.

Looking at your equation, you might try something like:


su return if segment==0
local r_bar=r(mean)
reg return L.return if segment ==0
predict forecast if segment == 1
predict res if segment == 1,res
g r_rhat_sq=res * res if segment == 1
g r_rbar_sq=(forecast - `rbar')^2 if segment == 1
su r_rhat_sq
local sumtop=r(sum)
su r_rbar_sq
local sumbot=r(sum)
local rsq=1 - (`sumtop'/`sumbot')
di "`rsq'"