Robust evaluation of fixed-event forecast rationality

Clements, M. ORCID: https://orcid.org/0000-0001-6329-1341 and Taylor, N. (2001) Robust evaluation of fixed-event forecast rationality. Journal of Forecasting, 20. pp. 285-295. ISSN 1099-131X doi: 10.1002/for.806

Abstract/Summary

In this paper we introduce a new testing procedure for evaluating the rationality of fixed-event forecasts based on a pseudo-maximum likelihood estimator. The procedure is designed to be robust to departures in the normality assumption. A model is introduced to show that such departures are likely when forecasters experience a credibility loss when they make large changes to their forecasts. The test is illustrated using monthly fixed-event forecasts produced by four UK institutions. Use of the robust test leads to the conclusion that certain forecasts are rational while use of the Gaussian-based test implies that certain forecasts are irrational. The difference in the results is due to the nature of the underlying data. Copyright © 2001 John Wiley & Sons, Ltd.