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Robust Evaluation of Fixed-Event Forecast Rationality

Michael Clements and Nick Taylor ()

Journal of Forecasting, 2001, vol. 20, issue 4, 285-95

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. Copyright © 2001 by John Wiley & Sons, Ltd.

Date: 2001
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