Combining forecasts: Operational adjustments to theoretically optimal rules

Combining forecasts: Operational adjustments to theoretically optimal rules

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Article ID: iaor1991813
Country: United States
Volume: 36
Issue: 9
Start Page Number: 1044
End Page Number: 1056
Publication Date: Sep 1990
Journal: Management Science
Authors: , ,
Keywords: information, time series & forecasting methods
Abstract:

Clemen and Winkler have described the theoretical effectiveness of Winkler’s formula for optimally combining forecasts. The optimality of Winkler’s formula is, however, contingent on actually knowing the forecasters’ statistical properties, i.e., the variances and covariances of their forecasts. In realistic applications, of course, these properties have to be estimated, usually from a set of prior forecasts. In this case the authors show how the ‘operationally optimal’ combining strategy differs from Winkler’s ‘theoretically optimal’ formula. Specifically, they provide figures indicating the operationally optimal strategy for combining two forecasts. The authors then propose a heuristic to choose the best set of parameter estimates in combining any number of forecasters and demonstrate its effectiveness via simulation.

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