Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 328: Adjusting for Information Content when Comparing Forecast Performance

Michael K. Andersson (), Ted Aranki () and André Reslow ()
Additional contact information
Michael K. Andersson: Finansinspektionen, Postal: Box 7821, 103 97 Stockholm
Ted Aranki: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
André Reslow: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: Cross institutional forecast evaluations may be severely distorted by the fact that forecasts are made at different points in time, and thus with different amount of information. This paper proposes a method to account for these differences. The method computes the timing effect and the forecaster's ability simultaneously. Monte Carlo simulation demonstrate that evaluations that do not adjust for the differences in information content may be misleading. In addition, the method is applied on a real-world data set of 10 Swedish forecasters for the period 1999-2015. The results show that the ranking of the forecasters is affected by the proposed adjustment.

Keywords: Forecast error; Forecast comparison; Publication time; Evaluation; Error component model; Panel data

JEL-codes: C23; C53; E37

26 pages, August 1, 2016

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