Article ID: | iaor20031247 |
Country: | United Kingdom |
Volume: | 20 |
Issue: | 4 |
Start Page Number: | 285 |
End Page Number: | 295 |
Publication Date: | Jul 2001 |
Journal: | International Journal of Forecasting |
Authors: | Clements Michael P., Taylor Nick |
In this paper we introduce a new testing procedure for evaluating the rationality of fixed-event forecasts based on a pseudo-maximum likelihood estimator. The procedure is designed to be robust to departures in the normality assumption. A model is introduced to show that such departures are likely when forecasters experience a credibility loss when they make large changes to their forecasts. The test is illustrated using monthly fixed-event forecasts produced by four UK institutions. Use of the robust test leads to the conclusion that certain forecasts are rational while use of the Gaussian-based test implies that certain forecasts are irrational. The difference in the results is due to the nature of the underlying data.