Measuring Uncertainty of a Combined Forecast and Some Tests for Forecaster Heterogeneity

Kajal Lahiri, Huaming Peng and Xuguang Simon Sheng

No 5468, CESifo Working Paper Series from CESifo

Abstract: We have argued that from the standpoint of a policy maker, the uncertainty of using the average forecast is not the variance of the average, but rather the average of the variances of the individual forecasts that incorporate idiosyncratic risks. With a slight reformulation of the loss function and a standard factor decomposition of a panel of forecasts, we show that the uncertainty of the average forecast can be expressed as the disagreement among the forecasters plus the volatility of the common shock. Using new statistics to test for the homogeneity of idiosyncratic errors under the joint limits with both T and n approaching infinity simultaneously, we show that some previously used measures significantly underestimate the conceptually correct benchmark forecast uncertainty.

Keywords: forecast combination; forecast uncertainty; model averaging; panel data (search for similar items in EconPapers)
JEL-codes: C12 C33 E37 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Chapter: Measuring Uncertainty of a Combined Forecast and Some Tests for Forecaster Heterogeneity* (2022)
Working Paper: Measuring Uncertainty of a Combined Forecast and Some Tests for Forecaster Heterogeneity (2021)
Working Paper: Measuring Uncertainty of a Combined Forecast and Some Tests for Forecaster Heterogeneity (2020)
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