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Analyzing Fixed-Event Forecast Revisions

Chia-Lin Chang (), Bert de Bruijn, Philip Hans Franses and Michael McAleer
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Bert de Bruijn: Erasmus University Rotterdam

No 13-057/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper resulted in a publication in the 'International Journal of Forecasting' , 2013, 29(4), 622-627. It is common practice to evaluate fixed-event forecast revisions in macroeconomics by regressing current forecast revisions on one-period lagged forecast revisions. Under weak-form (forecast) efficiency, the correlation between the current and one-period lagged revisions should be zero. The empirical findings in the literature suggest that this null hypothesis of zero correlation is rejected frequently, where the correlation can be either positive (which is widely interpreted in the literature as “smoothing”) or negative (which is widely interpreted as “over-reacting”). We propose a methodology to interpret such non-zero correlations in a straightforward and clear manner. Our approach is based on the assumption that numerical forecasts can be decomposed into both an econometric model and random expert intuition. We show that the interpretation of the sign of the correlation between the current and one-period lagged revisions depends on the process governing intuition, and the current and lagged correlations between intuition and news (or shocks to the numerical forecasts). It follows that the estimated non-zero correlation cannot be given a direct interpretation in terms of smoothing or over-reaction.

Keywords: Evaluating forecasts; Macroeconomic forecasting; Rationality; Intuition; Weak-form efficiency; Fixed-event forecasts (search for similar items in EconPapers)
JEL-codes: C22 C53 E27 E37 (search for similar items in EconPapers)
Date: 2013-04-11
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Related works:
Journal Article: Analyzing fixed-event forecast revisions (2013) Downloads
Working Paper: Analyzing Fixed-event Forecast Revisions (2013) Downloads
Working Paper: Analyzing Fixed-event Forecast Revisions (2011) Downloads
Working Paper: Analyzing Fixed-event Forecast Revisions (2011) Downloads
Working Paper: Analyzing Fixed-event Forecast Revisions (2011) Downloads
Working Paper: Analyzing Fixed-event Forecast Revisions (2011) Downloads
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