On economic evaluation of directional forecasts

Oliver J. Blaskowitz and Helmut Herwartz

No 2009-052, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: It is commonly accepted that information is helpful if it can be exploited to improve a decision making process. In economics, decisions are often based on forecasts of up- or downward movements of the variable of interest. We point out that directional forecasts can provide a useful framework to assess the economic forecast value when loss functions (or success measures) are properly formulated to account for realized signs and realized magnitudes of directional movements. We discuss a general approach to evaluate (directional) forecasts which is simple to implement, robust to outlying or unreasonable forecasts and which provides an economically interpretable loss/success functional framework. As such, the measure of directional forecast value is a readily available alternative to the commonly used squared error loss criterion.

Keywords: Directional forecasts; directional forecast value; forecast evaluation; economic forecast value; mean squared forecast error; mean absolute forecast error (search for similar items in EconPapers)
JEL-codes: C52 E17 E27 E37 E47 F17 F37 F47 G17 (search for similar items in EconPapers)
Date: 2009
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