Evaluating predictive performance of judgemental extrapolations from simulated currency series

Evaluating predictive performance of judgemental extrapolations from simulated currency series

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Article ID: iaor20001596
Country: Netherlands
Volume: 114
Issue: 2
Start Page Number: 281
End Page Number: 293
Publication Date: Apr 1999
Journal: European Journal of Operational Research
Authors: , , ,
Keywords: forecasting: applications, time series & forecasting methods
Abstract:

Judgemental forecasting of exchange rates is critical for financial decision-making. Detailed investigations of the potential effects of time-series characteristics on judgemental currency forecasts demand the use of simulated series where the form of the signal and probability distribution of noise are known. The accuracy measures Mean Absolute Error (MAE) and Mean Squared Error (MSE) are frequently applied quantities in assessing judgemental predictive performance on actual exchange rate date. The paper illustrates that, in applying these measures to simulated series with Normally distributed noise, it may be desirable to use their expected values after standardising the noise variance. A method of calculating the expected values for the MAE and MSE is set out, and an application to financial experts' judgemental currency forecasts is presented.

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