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On the aggregation of probability assessments: Regularized mixtures of predictive densities for Eurozone inflation and real interest rates

Author

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  • Diebold, Francis X.
  • Shin, Minchul
  • Zhang, Boyuan

Abstract

We propose methods for constructing regularized mixtures of density forecasts. We explore a variety of objectives and regularization penalties, and we use them in a substantive exploration of Eurozone inflation and real interest rate density forecasts. All individual inflation forecasters (even the ex post best forecaster) are outperformed by our regularized mixtures. From the Great Recession onward, the optimal regularization tends to move density forecasts’ probability mass from the centers to the tails, correcting for overconfidence.

Suggested Citation

  • Diebold, Francis X. & Shin, Minchul & Zhang, Boyuan, 2023. "On the aggregation of probability assessments: Regularized mixtures of predictive densities for Eurozone inflation and real interest rates," Journal of Econometrics, Elsevier, vol. 237(2).
    • Handle: RePEc:eee:econom:v:237:y:2023:i:2:s0304407622001464
    DOI: 10.1016/j.jeconom.2022.06.008
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    Keywords

    Density forecasts; Forecast combination; Survey forecasts; Shrinkage; Model selection; Regularization; Partially egalitarian LASSO; Model averaging; Subset averaging;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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