Measuring Forecast Uncertainty by Disagreement: The Missing Link

Journal of Applied Econometrics, Forthcoming

45 Pages Posted: 2 Nov 2008 Last revised: 12 Nov 2008

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: November 1, 2008

Abstract

Using a standard decomposition of forecasts errors into common and idiosyncratic shocks, we show that aggregate forecast uncertainty can be expressed as the disagreement among the forecasters plus the perceived variability of future aggregate shocks. Thus, the reliability of disagreement as a proxy for uncertainty will be determined by the stability of the forecasting environment, and the length of the forecast horizon. Using density forecasts from the Survey of Professional Forecasters, we find direct evidence in support of our hypothesis. Our results support the use of GARCH-type models, rather than the ex post squared errors in consensus forecasts, to estimate the ex ante variability of aggregate shocks as a component of aggregate uncertainty.

Keywords: Unanticipated aggregate shocks, Forecast disagreement, Forecast horizon, Forecast uncertainty, Density forecast, Panel data

JEL Classification: E17, E37

Suggested Citation

Lahiri, Kajal and Sheng, Xuguang Simon, Measuring Forecast Uncertainty by Disagreement: The Missing Link (November 1, 2008). Journal of Applied Econometrics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1293388

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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