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Analyzing Fixed-event Forecast Revisions

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Chang, Chia-Lin and Bruijn, Bert de and Franses, Philip Hans and McAleer, Michael (2013) Analyzing Fixed-event Forecast Revisions. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 14, 2013, ] (Unpublished)

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Official URL: http://eprints.ucm.es/20834/


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Abstract

It is common practice to evaluate fixed-event forecast revisions in macroeconomics by regressing current forecast revisions on one-period lagged forecast revisions. Under
weak-form (forecast) efficiency, the correlation between the current and one-period lagged revisions should be zero. The empirical findings in the literature suggest that this
null hypothesis of zero correlation is rejected frequently, where the correlation can be either positive (which is widely interpreted in the literature as “smoothing”) or negative (which is widely interpreted as “over-reacting”). We propose a methodology to interpret such non-zero correlations in a straightforward and clear manner. Our approach is based on the assumption that numerical forecasts can be decomposed into both an econometric model and random expert intuition. We show that the interpretation of the sign of the correlation between the current and one-period lagged revisions depends on the process governing intuition, and the current and lagged correlations between intuition and news (or shocks to the numerical forecasts). It follows that the estimated non-zero correlation cannot be given a direct interpretation in terms of smoothing or overreaction.


Item Type:Working Paper or Technical Report
Additional Information:

The authors are most grateful for the helpful comments and suggestions of the Editor,
an Associate Editor and two referees. For financial support, the first author acknowledges the National Science Council, Taiwan, and the fourth author wishes to thank the
Australian Research Council, National Science Council, Taiwan, and the Japan Society for the Promotion of Science.

Uncontrolled Keywords:Evaluating forecasts, Macroeconomic forecasting, Rationality, Intuition, Weak-form efficiency, Fixed-event forecasts.
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Macroeconomics
JEL:C22, C53, E27, E37
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2013
Number:14
ID Code:20834
Deposited On:15 Apr 2013 10:34
Last Modified:17 Jun 2016 12:16

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