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Abstract

This paper develops and analyzes a series of tests to evaluate the optimality of forecasts when forecasts for more than one horizon are available. The tests are based on the property that the unconditional expected loss of optimal forecasts should not decrease with the forecast horizon (e.g., under quadratic loss the variance of optimal forecast errors should not decrease with the horizon). The tests complement existing methods of forecast evaluation, such as Mincer-Zarnowitz-type tests, by using an implication of optimality that directly concerns forecasts made at different horizons. The finite sample performance of the tests is analyzed and an illustration using the Survey of Professional Forecasters is provided.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B70D7826E-485A-2259-30B1-3216148E1E94%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2007-14.

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Date of creation: Dec 2007
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Handle: RePEc:bdm:wpaper:2007-14

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Web page: http://www.banxico.org.mx
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Related research

Keywords: Forecast Evaluation; Composite Hypothesis;

Find related papers by JEL classification:

• C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
• C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
• E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications

References

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Cited by:

1. Patton, Andrew J & Timmermann, Allan G, 2011. "Forecast Rationality Tests Based on Multi-Horizon Bounds," CEPR Discussion Papers 8194, C.E.P.R. Discussion Papers.
   
   • Andrew J. Patton & Allan Timmermann, 2012. "Forecast Rationality Tests Based on Multi-Horizon Bounds," Journal of Business & Economic Statistics, American Statistical Association, vol. 30(1), pages 1-17, January.

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