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Does Disagreement Amongst Forecasters have Predictive Value?

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  • Legerstee, R.
  • Franses, Ph.H.B.F.

Abstract

Forecasts from various experts are often used in macroeconomic forecasting models. Usually the focus is on the mean or median of the survey data. In the present study we adopt a different perspective on the survey data as we examine the predictive power of disagreement amongst forecasters. The premise is that this variable could signal upcoming structural or temporal changes in an economic process or in the predictive power of the survey forecasts. In our empirical work, we examine a variety of macroeconomic variables, and we use different measurements for the degree of disagreement, together with measures for location of the survey data and autoregressive components. Forecasts from simple linear models and forecasts from Markov regime-switching models with constant and with time-varying transition probabilities are constructed in real-time and compared on forecast accuracy. We find that disagreement has predictive power indeed and that this variable can be used to improve forecasts when used in Markov regime-switching models.

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Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2010-53.

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Date of creation: 22 Sep 2010
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Handle: RePEc:ems:eureir:20744

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Keywords: Markov regime-switching models; disagreement; expert forecasts; model forecasts; survey forecasts; time series;

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References

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  1. Allan Timmermann, 1999. "Moments of Markov Switching Models," FMG Discussion Papers, Financial Markets Group dp323, Financial Markets Group.
  2. Elliott, Graham & Timmermann, Allan G, 2004. "Optimal Forecast Combination Under Regime Switching," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4649, C.E.P.R. Discussion Papers.
  3. Aurelien Baillon & Laure Cabantous, 2009. "Combining imprecise or conflicting probability judgments: A choice-based study," ICBBR Working Papers, International Centre for Behavioural Business Research 3, International Centre for Behavioural Business Research.
  4. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0169, National Bureau of Economic Research, Inc.
  5. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, Elsevier, vol. 13(2), pages 281-291, June.
  6. Mc Cracken, Michael W., 2000. "Robust out-of-sample inference," Journal of Econometrics, Elsevier, Elsevier, vol. 99(2), pages 195-223, December.
  7. Kajal Lahiri & Xuguang Sheng, 2009. "Measuring Forecast Uncertainty by Disagreement: The Missing Link," Discussion Papers, University at Albany, SUNY, Department of Economics 09-06, University at Albany, SUNY, Department of Economics.
  8. Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(3), pages 591-621, June.
  9. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, Elsevier, vol. 5(4), pages 559-583.
  10. Zacharias Psaradakis & Nicola Spagnolo, 2006. "Joint Determination of the State Dimension and Autoregressive Order for Models with Markov Regime Switching," Journal of Time Series Analysis, Wiley Blackwell, Wiley Blackwell, vol. 27(5), pages 753-766, 09.
  11. Smith, Aaron & Naik, Prasad A. & Tsai, Chih-Ling, 2006. "Markov-switching model selection using Kullback-Leibler divergence," Journal of Econometrics, Elsevier, Elsevier, vol. 134(2), pages 553-577, October.
  12. Lamont, Owen A., 2002. "Macroeconomic forecasts and microeconomic forecasters," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 48(3), pages 265-280, July.
  13. Webby, Richard & O'Connor, Marcus, 1996. "Judgemental and statistical time series forecasting: a review of the literature," International Journal of Forecasting, Elsevier, Elsevier, vol. 12(1), pages 91-118, March.
  14. Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
  15. David Laster & Paul Bennett & In Sun Geoum, 1999. "Rational Bias In Macroeconomic Forecasts," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(1), pages 293-318, February.
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Cited by:
  1. Badarinza, Cristian & Buchmann, Marco, 2011. "Macroeconomic vulnerability and disagreement in expectations," Working Paper Series, European Central Bank 1407, European Central Bank.

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