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

78 Pages Posted: 14 Jan 2021

See all articles by Kajal Lahiri

Kajal Lahiri

State University of New York (SUNY) at Albany

Huaming Peng

Rensselaer Polytechnic Institute (RPI)

Xuguang Sheng

American University

Multiple version iconThere are 2 versions of this paper

Date Written: 2020

Abstract

We have argued that from the standpoint of a policy maker who has access to a number of expert forecasts, the uncertainty of a combined forecast should be interpreted as that of a typical forecaster randomly drawn from the pool. With a standard factor decomposition of a panel of forecasts, we show that the uncertainty of a typical forecaster 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 find that some previously used measures significantly underestimate the conceptually correct benchmark forecast uncertainty.

JEL Classification: C120, C330, E370

Suggested Citation

Lahiri, Kajal and Peng, Huaming and Sheng, Xuguang, Measuring Uncertainty of a Combined Forecast and Some Tests for Forecaster Heterogeneity (2020). CESifo Working Paper No. 8810, Available at SSRN: https://ssrn.com/abstract=3765308 or http://dx.doi.org/10.2139/ssrn.3765308

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 Sheng

American University ( email )

4400 Massachusetts Ave, NW
Washington, DC 20016
United States

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