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Forecasters’ utility and forecast coherence

Emilio Zanetti Chini ()

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We introduce a new definition of probabilistic forecasts’ coherence based on the divergence between forecasters’ expected utility and their own models’ likelihood function. When the divergence is zero, this utility is said to be local. A new micro-founded forecasting environment, the “Scoring Structure”, where the forecast users interact with forecasters, allows econometricians to build a formal test for the null hypothesis of locality. The test behaves consistently with the requirements of the theoretical literature. The locality is fundamental to set dating algorithms for the assessment of the probability of recession in U.S. business cycle and central banks’ “fan” charts.

Keywords: Business Cycle; Fan Charts; Locality Testing; Smooth Transition Auto-Regressions; Predictive Density; Scoring Rules and Structures (search for similar items in EconPapers)
JEL-codes: C12 C22 C44 C53 (search for similar items in EconPapers)
Date: 2018-08-21
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ftp://ftp.econ.au.dk/creates/rp/18/rp18_23.pdf (application/pdf)

Related works:
Working Paper: Forecaster’s utility and forecasts coherence (2018) Downloads
Working Paper: Forecaster’s utility and forecasts coherence (2018) Downloads
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