Analyzing Fixed-event Forecast Revisions

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

No 2013-14, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: 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 overreaction.

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)
Pages: 22 pages
Date: 2013, Revised 2013-04
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https://eprints.ucm.es/id/eprint/20834/1/1314.pdf (application/pdf)

Related works:
Journal Article: Analyzing fixed-event forecast revisions (2013)
Working Paper: Analyzing Fixed-Event Forecast Revisions (2013)
Working Paper: Analyzing Fixed-event Forecast Revisions (2011)
Working Paper: Analyzing Fixed-event Forecast Revisions (2011)
Working Paper: Analyzing Fixed-event Forecast Revisions (2011)
Working Paper: Analyzing Fixed-event Forecast Revisions (2011)
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