Evolution of Forecast Disagreement in a Bayesian Learning Model

49 Pages Posted: 1 Aug 2007

See all articles by Kajal Lahiri

Kajal Lahiri

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics

Xuguang Simon Sheng

American University

Date Written: July 2007

Abstract

We estimate a Bayesian learning model with heterogeneity aimed at explaining expert forecast disagreement and its evolution over horizons. Disagreement is postulated to have three components due to differences in: i) the initial prior beliefs, ii) the weights attached on priors, and iii) interpreting public information. The fixed-target, multi-horizon, cross-country feature of the panel data allows us to estimate the relative importance of each component precisely. The first component explains nearly all to 30% of forecast disagreement as the horizon decreases from 24 months to 1 month. This finding firmly establishes the role of initial prior beliefs in generating expectation stickiness. We find the second component to have barely any effect on the evolution of forecast disagreement among experts. The importance of the third component increases from almost nothing to 70% as the horizon gets shorter via its interaction with the quality of the incoming news. We propose a new test of forecast efficiency in the context of Bayesian information processing and find significant heterogeneity in the nature of inefficiency across horizons and countries.

Keywords: Forecast Disagreement, Forecast Horizon, Forecast Efficiency, Consensus Forecast, Differential Interpretation, Public Information, Bayesian Learning, Panel Data

JEL Classification: C11, E17

Suggested Citation

Lahiri, Kajal and Sheng, Xuguang Simon, Evolution of Forecast Disagreement in a Bayesian Learning Model (July 2007). Available at SSRN: https://ssrn.com/abstract=1004294 or http://dx.doi.org/10.2139/ssrn.1004294

Kajal Lahiri (Contact Author)

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics ( email )

Department of Economics
1400 Washington Avenue
Albany, NY 12222
United States
518-442 4758 (Phone)
518-442 4736 (Fax)

HOME PAGE: http://www.albany.edu/~klahiri

Xuguang Simon Sheng

American University ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States

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