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Forecasting Efficiency: Concepts and Applications

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Abstract

The question of forecasting accuracy is, of course, one that has been the subject of numerous investigations over the last two decades. The present study contributes to this line of research in two ways. First, we introduce a new concept, called "forecast efficiency," that measures the extent to which information is incorporated into forecasts. This concept is closely related to concepts of efficiency used in the analysis of stock and other financial markets. The paper proves two readily testable propositions about efficient forecasts. Second, the empirical part of the study examines forecast efficiency by looking at forecast revisions ("fixed-horizon forecasts"), rather than a series of forecasts of different events ("rolling-horizon forecasts") as is the case for most studies of forecasting. This new approach to estimation in certain circumstances will provide a more powerful test of forecast efficiency. A number of fixed-horizon forecasts are collected and these are tested for forecast efficiency.

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File URL: http://cowles.econ.yale.edu/P/cd/d07b/d0774.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 774.

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Length: 26 pages
Date of creation: Sep 1985
Date of revision:
Publication status: Published in Review of Economics and Statistics (November 1987), 69(4): 667-674
Handle: RePEc:cwl:cwldpp:774

Note: CFP 692.
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Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Forecasting accuracy; forecast efficiency; efficient forecasts;

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  1. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 457-510.
  2. Arrow, Kenneth J, 1982. "Risk Perception in Psychology and Economics," Economic Inquiry, Western Economic Association International, vol. 20(1), pages 1-9, January.
  3. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Cowles Foundation Discussion Papers 719R, Cowles Foundation for Research in Economics, Yale University.
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