Measuring Forecast Uncertainty by Disagreement: The Missing Link
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.
|Date of creation:||2008|
|Contact details of provider:|| Postal: Poschingerstr. 5, 81679 München|
Web page: http://www.cesifo-group.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Zarnowitz, Victor & Lambros, Louis A, 1987. "Consensus and Uncertainty in Economic Prediction," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 591-621, June.
- Davies, Anthony & Lahiri, Kajal, 1995. "A new framework for analyzing survey forecasts using three-dimensional panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 205-227, July.
- Mankiw, N. Gregory & Reis, Ricardo & Wolfers, Justin, 2003.
"Disagreement about Inflation Expectations,"
1807, Stanford University, Graduate School of Business.
- N. Gregory Mankiw & Ricardo Augusto Marc Rocha Reis & Justin Wolfers, 2004. "Disagreement about Inflation Expectations," Yale School of Management Working Papers ysm391, Yale School of Management.
- N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," Harvard Institute of Economic Research Working Papers 2011, Harvard - Institute of Economic Research.
- N. Gregory Mankiw & Ricardo Reis & Justin Wolfers, 2003. "Disagreement about Inflation Expectations," NBER Working Papers 9796, National Bureau of Economic Research, Inc.
- X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, 02.
- Gianna Boero & Jeremy Smith & KennethF. Wallis, 2008.
"Uncertainty and Disagreement in Economic Prediction: The Bank of England Survey of External Forecasters,"
Royal Economic Society, vol. 118(530), pages 1107-1127, 07.
- Boero,Gianna & Smith,Jeremy & Wallis,Kenneth F, 2006. "Uncertainty and disagreement in economic prediction : the Bank of England Survey of External Forecasters," The Warwick Economics Research Paper Series (TWERPS) 811, University of Warwick, Department of Economics.
- Kajal Lahiri, 2005. "Analysis of Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 1093-1095.
- Lahiri, Kajal & Sheng, Xuguang, 2008. "Evolution of forecast disagreement in a Bayesian learning model," Journal of Econometrics, Elsevier, vol. 144(2), pages 325-340, June.
- Banerjee, Anindya & Marcellino, Massimiliano, 2006.
"Are there any reliable leading indicators for US inflation and GDP growth?,"
International Journal of Forecasting,
Elsevier, vol. 22(1), pages 137-151.
- Anindya Banerjee & Massimiliano Marcellino, 2003. "Are There Any Reliable Leading Indicators for U.S. Inflation and GDP Growth?," Working Papers 236, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Anindya BANERJEE & Massimiliano MARCELLINO, 2002. "Are There Any Reliable Leading Indicators for US Inflation and GDP Growth?," Economics Working Papers ECO2002/21, European University Institute.
- Joseph Engelberg & Charles F. Manski & Jared Williams, 2006.
"Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters,"
NBER Working Papers
11978, National Bureau of Economic Research, Inc.
- Engelberg, Joseph & Manski, Charles F. & Williams, Jared, 2009. "Comparing the Point Predictions and Subjective Probability Distributions of Professional Forecasters," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 30-41.
- Lahiri, Kajal & Teigland, Christie & Zaporowski, Mark, 1988. "Interest Rates and the Subjective Probability Distribution of Inflation Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 233-48, May.
- Abarbanell, Jeffery S. & Lanen, William N. & Verrecchia, Robert E., 1995. "Analysts' forecasts as proxies for investor beliefs in empirical research," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 31-60, July.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Lahiri, Kajal & Liu, Fushang, 2005. "ARCH models for multi-period forecast uncertainty-a reality check using a panel of density forecasts," MPRA Paper 21693, University Library of Munich, Germany.
- Söderlind, Paul, 2000.
"Inflation Forecast Uncertainty,"
CEPR Discussion Papers
2499, C.E.P.R. Discussion Papers.
- Giordani, Paolo & Soderlind, Paul, 2000. "Inflation Forecast Uncertainty," SSE/EFI Working Paper Series in Economics and Finance 384, Stockholm School of Economics, revised 09 Oct 2000.
- Tim Bollerslev, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
EERI Research Paper Series
EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
- Kenneth F. Wallis, 2005. "Combining Density and Interval Forecasts: A Modest Proposal," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 983-994, December.
- Rich, Robert W & Butler, J S, 1998. "Disagreement as a Measure of Uncertainty: A Comment on Bomberger," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 411-19, August.
- Patton, Andrew J & Timmermann, Allan G, 2007. "Learning in Real Time: Theory and Empirical Evidence from the Term Structure of Survey Forecasts," CEPR Discussion Papers 6526, C.E.P.R. Discussion Papers.
- Fushang Liu & Kajal Lahiri, 2006.
"Modelling multi-period inflation uncertainty using a panel of density forecasts,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 21(8), pages 1199-1219.
- Kajal Lahiri & Fushang Liu, 2006. "Modeling Multi-Period Inflation Uncertainty Using a Panel of Density Forcasts," Discussion Papers 06-05, University at Albany, SUNY, Department of Economics.
- Victor Zarnowitz & Louis A. Lambros, 1983. "Consensus and Uncertainty in Economic Prediction," NBER Working Papers 1171, National Bureau of Economic Research, Inc.
- Batchelor, Roy & Dua, Pami, 1993. "Survey vs ARCH Measures of Inflation Uncertainty," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 341-353, August.
- David L. Reifschneider & Peter Tulip, 2007. "Gauging the uncertainty of the economic outlook from historical forecasting errors," Finance and Economics Discussion Series 2007-60, Board of Governors of the Federal Reserve System (U.S.).
- Barry, Christopher B. & Jennings, Robert H., 1992. "Information and Diversity of Analyst Opinion," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(02), pages 169-183, June.
- Harvey, David I. & Newbold, Paul, 2003. "The non-normality of some macroeconomic forecast errors," International Journal of Forecasting, Elsevier, vol. 19(4), pages 635-653.
- Bomberger, William A, 1999. "Disagreement and Uncertainty: A Reply to Richa and Butler," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 273-76, May.
- Frederic S. Mishkin, 2007.
NBER Working Papers
13147, National Bureau of Economic Research, Inc.
- Roy Batchelor & Pami Dua, 1995. "Forecaster Diversity and the Benefits of Combining Forecasts," Management Science, INFORMS, vol. 41(1), pages 68-75, January.
- Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 381-92, August.
When requesting a correction, please mention this item's handle: RePEc:ces:ifowps:_60. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)
If references are entirely missing, you can add them using this form.