Estimating Loss Function Parameters

55 Pages Posted: 6 May 2003

See all articles by Graham Elliott

Graham Elliott

University of California, San Diego (UCSD) - Department of Economics

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Ivana Komunjer

University of California, San Diego (UCSD) - Department of Economics

Date Written: March 2003

Abstract

In situations where a sequence of forecasts is observed, a common strategy is to examine 'rationality' conditional on a given loss function. We examine this from a different perspective - supposing that we have a family of loss functions indexed by unknown shape parameters, then given the forecasts can we back out the loss function parameters consistent with the forecasts being rational even when we do not observe the underlying forecasting model? We establish identification of the parameters of a general class of loss functions that nest popular loss functions as special cases and provide estimation methods and asymptotic distributional results for these parameters. The methods are applied in an empirical analysis of IMF and OECD forecasts of budget deficits for the G7 countries. We find that allowing for asymmetric loss can significantly change the outcome of empirical tests of forecast rationality.

Keywords: IMF, OECD, asymmetric loss, macroeconomic forecasting

JEL Classification: C10, E00

Suggested Citation

Elliott, Graham and Timmermann, Allan and Komunjer, Ivana, Estimating Loss Function Parameters (March 2003). Available at SSRN: https://ssrn.com/abstract=404700

Graham Elliott

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4481 (Phone)
858-534-7040 (Fax)

Allan Timmermann (Contact Author)

UCSD ( email )

9500 Gilman Drive
La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ivana Komunjer

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
(+1 858) 822-0667 (Phone)
(+1 858) 534-0712 (Fax)

HOME PAGE: http://econ.ucsd.edu/komunjer

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