Optimal probabilistic forecasts: When do they work?

Ruben Loaiza-Maya (), Gael Martin (), David Frazier (), Worapree Maneesoonthorn () and Andrés Ramírez Hassan ()
Authors registered in the RePEc Author Service: Rubén Albeiro Loaiza Maya

No 33/20, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: Proper scoring rules are used to assess the out-of-sample accuracy of probabilistic forecasts, with different scoring rules rewarding distinct aspects of forecast performance. Herein, we reinvestigate the practice of using proper scoring rules to produce probabilistic forecasts that are 'optimal' according to a given score, and assess when their out-of-sample accuracy is superior to alternative forecasts, according to that score. Particular attention is paid to relative predictive performance under misspecification of the predictive model. Using numerical illustrations, we document several novel findings within this paradigm that highlight the important interplay between the true data generating process, the assumed predictive model and the scoring rule. Notably, we show that only when a predictive model is sufficiently compatible with the true process to allow a particular score criterion to reward what it is designed to reward, will this approach to forecasting reap benefits. Subject to this compatibility however, the superiority of the optimal forecast will be greater, the greater is the degree of misspecification. We explore these issues under a range of different scenarios, and using both artificially simulated and empirical data.

Keywords: coherent predictions; linear predictive pools; predictive distributions; proper scoring rules; stochastic volatility with jumps; testing equal predictive ability (search for similar items in EconPapers)
JEL-codes: C18 C53 C58 (search for similar items in EconPapers)
Pages: 32
Date: 2020
New Economics Papers: this item is included in nep-ecm, nep-for and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal probabilistic forecasts: When do they work? (2022)
Working Paper: Optimal probabilistic forecasts: When do they work? (2020)
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