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Measuring Forecast Uncertainty by Disagreement: The Missing Link

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Listed author(s):
  • Kajal Lahiri
  • Xuguang Sheng

Abstract

Using a standard decomposition of forecasts errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus, the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment, and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared error in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-Ifo_Working_Papers/wp-ifo-2005-2010/IfoWorkingPaper-60.pdf
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Paper provided by Ifo Institute - Leibniz Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Paper No. 60.

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Date of creation: 2008
Handle: RePEc:ces:ifowps:_60
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Keywords: Aggregate shocks; public information; forecast disagreement; forecast horizon; forecast uncertainty; panel data; private information;

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Find related papers by JEL classification:
  • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
  • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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