Measuring Uncertainty of a Combined Forecast and Some Tests for Forecaster Heterogeneity

53 Pages Posted: 14 Aug 2015

See all articles by Kajal Lahiri

Kajal Lahiri

State University of New York (SUNY) at Albany

Huaming Peng

Rensselaer Polytechnic Institute (RPI)

Xuguang Simon Sheng

American University

Multiple version iconThere are 2 versions of this paper

Date Written: August 13, 2015

Abstract

We have argued that from the standpoint of a policy maker, the uncertainty of using the average forecast is not the variance of the average, but rather the average of the variances of the individual forecasts that incorporate idiosyncratic risks. With a slight reformulation of the loss function and a standard factor decomposition of a panel of forecasts, we show that the uncertainty of the average forecast can be expressed as the disagreement among the forecasters plus the volatility of the common shock. Using new statistics to test for the homogeneity of idiosyncratic errors under the joint limits with both T and n approaching infinity simultaneously, we show that some previously used measures significantly underestimate the conceptually correct benchmark forecast uncertainty.

Keywords: forecast combination, forecast uncertainty, model averaging, panel data

JEL Classification: C120, C330, E370

Suggested Citation

Lahiri, Kajal and Peng, Huaming and Sheng, Xuguang Simon, Measuring Uncertainty of a Combined Forecast and Some Tests for Forecaster Heterogeneity (August 13, 2015). CESifo Working Paper Series No. 5468, Available at SSRN: https://ssrn.com/abstract=2643370 or http://dx.doi.org/10.2139/ssrn.2643370

Kajal Lahiri (Contact Author)

State University of New York (SUNY) at Albany ( 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

Huaming Peng

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

Xuguang Simon Sheng

American University ( email )

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

HOME PAGE: http://https://www.american.edu/cas/faculty/sheng.cfm

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