Categorical Forecasts and Non-Categorical Loss Functions

13 Pages Posted: 14 May 2020

See all articles by Constantin Bürgi

Constantin Bürgi

St. Mary's College of Maryland

Dorine Boumans

CESifo (Center for Economic Studies and Ifo Institute)

Date Written: 2020

Abstract

This paper introduces a new test of the predictive performance and market timing for categorical forecasts based on contingency tables when the user has non-categorical loss functions. For example, a user might be interested in the return of an underlying variable instead of just the direction. This new test statistic can also be used to determine whether directional forecasts are derived from non-directional forecasts and whether point forecast have predictive value when transformed into directional forecasts. The tests are applied to the categorical exchange rate forecasts in the ifo-Institute's World Economic Survey and to the point forecasts for quarterly GDP in the Philadelphia Fed's Survey of Professional Forecasters. We find that the loss function matters as exchange rate forecasters perform better under non-categorical loss functions, and the GDP forecasts have value up to two quarters ahead.

Keywords: contingency tables, categorical forecast, profitability, World Economic Survey, directional accuracy, market timing, forecast value

JEL Classification: C120, C520, E370, F370

Suggested Citation

Bürgi, Constantin and Boumans, Dorine, Categorical Forecasts and Non-Categorical Loss Functions (2020). CESifo Working Paper No. 8266, Available at SSRN: https://ssrn.com/abstract=3598751

Constantin Bürgi (Contact Author)

St. Mary's College of Maryland ( email )

St. Mary's City, MD 20686
United States

Dorine Boumans

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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