Analyzing Fixed-event Forecast Revisions
It is common practice to evaluate fixed-event forecast revisions in macroeconomics by regressing current revisions on one-period lagged revisions. Under weak-form efficiency, the correlation between the current and one-period lagged revisions should be zero. The empirical findings in the literature suggest that the null hypothesis of zero correlation between the current and one-period lagged revisions is rejected quite frequently, where the correlation can be either positive or negative. In this paper we propose a methodology to be able to interpret such non-zero correlations in a straightforward manner. Our approach is based on the assumption that forecasts can be decomposed into both an econometric model and expert intuition. The interpretation of the sign of the correlation between the current and one-period lagged revisions depends on the process governing intuition, and the correlation between intuition and news.
|Keywords||evaluating forecasts, fixed-event forecasts, intuition, macroeconomic forecasting, rationality, weak-form efficiency|
|JEL||Time-Series Models; Dynamic Quantile Regressions (jel C22), Forecasting and Other Model Applications (jel C53), Forecasting and Simulation (jel E27), Forecasting and Simulation (jel E37)|
|Publisher||Erasmus School of Economics|
|Series||Econometric Institute Research Papers|
|Journal||Report / Econometric Institute, Erasmus University Rotterdam|
Franses, Ph.H.B.F, Chang, C-L, & McAleer, M.J. (2011). Analyzing Fixed-event Forecast Revisions (No. EI 2011-22). Report / Econometric Institute, Erasmus University Rotterdam (pp. 1–20). Erasmus School of Economics. Retrieved from http://hdl.handle.net/1765/23785