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Testable implications of forecast optimality

Patton, Andrew J. and Timmermann, Allan (2005) Testable implications of forecast optimality. EM, 485. Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, London, UK.

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Abstract

Evaluation of forecast optimality in economics and finance has almost exclusively been conducted on the assumption of mean squared error loss under which forecasts should be unbiased and forecast errors serially uncorrelated at the single period horizon with increasing variance as the forecast horizon grows. This paper considers properties of optimal forecasts under general loss functions and establishes new testable implications of forecast optimality. These hold when the forecaster’s loss function is unknown but testable restrictions can be imposed on the data generating process, trading off conditions on the data generating process against conditions on the loss function. Finally, we propose flexible parametric estimation of the forecaster’s loss function, and obtain a test of forecast optimality via a test of over-identifying restrictions.

Item Type: Monograph (Discussion Paper)
Official URL: http://sticerd.lse.ac.uk
Additional Information: © 2005 Andrew J.Patton and Allan Timmermann
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Other Model Applications
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation and Selection
C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C22 - Time-Series Models
Sets: Departments > Accounting and Finance
Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 485
Date Deposited: 09 Jul 2008 13:39
URL: http://eprints.lse.ac.uk/6834/

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