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Testing the value of probability forecasts for calibrated combining

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  • Lahiri, Kajal
  • Peng, Huaming
  • Zhao, Yongchen

Abstract

We combine the probability forecasts of a real GDP decline from the US Survey of Professional Forecasters, after trimming the forecasts that do not have “value”, as measured by the Kuiper Skill Score and in the sense of Merton (1981). For this purpose, we use a simple test to evaluate the probability forecasts. The proposed test does not require the probabilities to be converted to binary forecasts before testing, and it accommodates serial correlation and skewness in the forecasts. We find that the number of forecasters making valuable forecasts decreases sharply as the horizon increases. The beta-transformed linear pool combination scheme, based on the valuable individual forecasts, is shown to outperform the simple average for all horizons on a number of performance measures, including calibration and sharpness. The test helps to identify the good forecasters ex ante, and therefore contributes to the accuracy of the combined forecasts.

Suggested Citation

  • Lahiri, Kajal & Peng, Huaming & Zhao, Yongchen, 2015. "Testing the value of probability forecasts for calibrated combining," International Journal of Forecasting, Elsevier, vol. 31(1), pages 113-129.
  • Handle: RePEc:eee:intfor:v:31:y:2015:i:1:p:113-129
    DOI: 10.1016/j.ijforecast.2014.03.005
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    Cited by:

    1. Constantin Bürgi & Tara M. Sinclair, 2017. "A nonparametric approach to identifying a subset of forecasters that outperforms the simple average," Empirical Economics, Springer, vol. 53(1), pages 101-115, August.
    2. Graham Elliott, 2017. "Forecast combination when outcomes are difficult to predict," Empirical Economics, Springer, vol. 53(1), pages 7-20, August.
    3. Yongchen Zhao, 2020. "Predicting U.S. Business Cycle Turning Points Using Real-Time Diffusion Indexes Based on a Large Data Set," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 16(2), pages 77-97, November.

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