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On economic evaluation of directional forecasts

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  • Blaskowitz, Oliver
  • Herwartz, Helmut

Abstract

It is commonly accepted that information is helpful if it can be exploited to improve a decision making process. In economics, decisions are often based on forecasts of the upward or downward movements of the variable of interest. We point out that directional forecasts can provide a useful framework for assessing the economic forecast value when loss functions (or success measures) are properly formulated to account for the realized signs and realized magnitudes of directional movements. We discuss a general approach to (directional) forecast evaluation which is based on the loss function proposed by Granger, Pesaran and Skouras. It is simple to implement and provides an economically interpretable loss/success functional framework. We show that, in addition, this loss function is more robust to outlying forecasts than traditional loss functions. As such, the measure of the directional forecast value is a readily available complement to the commonly used squared error loss criterion.

Suggested Citation

  • Blaskowitz, Oliver & Herwartz, Helmut, 2011. "On economic evaluation of directional forecasts," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1058-1065, October.
  • Handle: RePEc:eee:intfor:v:27:y:2011:i:4:p:1058-1065
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    References listed on IDEAS

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    1. Oliver Blaskowitz & Helmut Herwartz, 2009. "Adaptive forecasting of the EURIBOR swap term structure," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(7), pages 575-594.
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    Cited by:

    1. Helmut Herwartz & Konstantin A. Kholodilin, 2014. "In‐Sample and Out‐of‐Sample Prediction of stock Market Bubbles: Cross‐Sectional Evidence," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 33(1), pages 15-31, January.
    2. Costantini, Mauro & Cuaresma, Jesus Crespo & Hlouskova, Jaroslava, 2014. "Can Macroeconomists Get Rich Forecasting Exchange Rates?," Economics Series 305, Institute for Advanced Studies.
    3. repec:eee:intfor:v:33:y:2017:i:3:p:569-580 is not listed on IDEAS
    4. Chen, Qiwei & Costantini, Mauro & Deschamps, Bruno, 2016. "How accurate are professional forecasts in Asia? Evidence from ten countries," International Journal of Forecasting, Elsevier, vol. 32(1), pages 154-167.
    5. Christian Pierdzioch & Monique B. Reid & Rangan Gupta, 2014. "On the Directional Accuracy of Inflation Forecasts: Evidence from South African Survey Data," Working Papers 24/2014, Stellenbosch University, Department of Economics.
    6. Lahiri, Kajal & Yang, Liu, 2013. "Forecasting Binary Outcomes," Handbook of Economic Forecasting, Elsevier.
    7. Francisco Javier Eransus & Alfonso Novales Cinca, 2014. "Parameter Estimation Error in Tests of Predictive Performance under Discrete Loss Functions," Documentos de Trabajo del ICAE 2014-22, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    8. Emilian Dobrescu, 2014. "Attempting to Quantify the Accuracy of Complex Macroeconomic Forecasts," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 5-21, December.
    9. Crespo Cuaresma, Jesus & Fortin, Ines & Hlouskova, Jaroslava, 2017. "Exchange rate forecasting and the performance of currency portfolios," Economics Series 326, Institute for Advanced Studies.
    10. Santamaría-Bonfil, G. & Reyes-Ballesteros, A. & Gershenson, C., 2016. "Wind speed forecasting for wind farms: A method based on support vector regression," Renewable Energy, Elsevier, vol. 85(C), pages 790-809.
    11. Bergmeir, Christoph & Costantini, Mauro & Benítez, José M., 2014. "On the usefulness of cross-validation for directional forecast evaluation," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 132-143.
    12. Ince, Onur & Molodtsova, Tanya, 2017. "Rationality and forecasting accuracy of exchange rate expectations: Evidence from survey-based forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 131-151.
    13. Tsuchiya, Yoichi, 2014. "Purchasing and supply managers provide early clues on the direction of the US economy: An application of a new market-timing test," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 599-618.

    More about this item

    Keywords

    Directional forecasts Directional forecast value Forecast evaluation Economic forecast value Mean squared forecast error Mean absolute forecast error;

    JEL classification:

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

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