Robust evaluation of fixed-event forecast rationality

Robust evaluation of fixed-event forecast rationality

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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: ,
Abstract:

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.

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