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On economic evaluation of directional forecasts

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Author Info
Oliver Blaskowitz
Helmut Herwartz

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Abstract

It is commonly accepted that information is helpful if it can be exploited to improve a decision mak- ing process. In economics, decisions are often based on forecasts of up{ or downward movements of the variable of interest. We point out that directional forecasts can provide a useful framework to assess the economic forecast value when loss functions (or success measures) are properly formu- lated to account for realized signs and realized magnitudes of directional movements. We discuss a general approach to evaluate (directional) forecasts which is simple to implement, robust to outlying or unreasonable forecasts and which provides an economically interpretable loss/success functional framework. As such, the measure of directional forecast value is a readily available alternative to the commonly used squared error loss criterion.

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Publisher Info
Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-052.

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Length: 20 pages
Date of creation: Oct 2009
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Handle: RePEc:hum:wpaper:sfb649dp2009-052

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Related research
Keywords: Directional forecasts; directional forecast value; forecast evaluation; economic forecast value; mean squared forecast error; mean absolute forecast error;

Find related papers by JEL classification:
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation
G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting

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This page was last updated on 2009-11-25.

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