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Forecast evaluation and combination

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  • Francis X. Diebold
  • Jose A. Lopez

Abstract

Forecasts are of great importance and widely used in economics and finance. Quite simply, good forecasts lead to good decisions. The importance of forecast evaluation and combination techniques follows immediately—forecast users naturally have a keen interest in monitoring and improving forecast performance. Here we provide a five-part selective account of forecast evaluation and combination methods. In the first, we discuss evaluation of a single forecast, and in particular, evaluation of whether and how it may be improved. In the second, we discuss the evaluation and comparison of the accuracy of competing forecasts. In the third, we discuss whether and how a set of forecasts may be combined to produce a superior composite forecast. In the fourth, we describe a number of forecast evaluation topics of particular relevance in economics and finance, including methods for evaluating direction-of-change forecasts, probability forecasts and volatility forecasts. In the fifth, we conclude.

Suggested Citation

  • Francis X. Diebold & Jose A. Lopez, 1995. "Forecast evaluation and combination," Research Paper 9525, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednrp:9525
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    Keywords

    Forecasting;

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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