Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - An example of an optimal forecast exhibiting decreasing bias with increasing forecast horizon
AU - Aretz, Kevin
AU - Peel, David
PY - 2013/10
Y1 - 2013/10
N2 - Motivated by a central banker with an inflation target, we show that the optimal forecast bias under non-quadratic loss functions and non-normal forecast errors can decrease or initially increase and then decrease with the forecast horizon. We initially proof that, if the variable to forecast can be described by a generalized Rayleigh distribution, its conditional mean does in general not constitute the optimal prediction under a symmetric target zone loss function. Subsequently, we approximate the target zone loss function to show the potential for variation in optimal bias over the forecast horizon.
AB - Motivated by a central banker with an inflation target, we show that the optimal forecast bias under non-quadratic loss functions and non-normal forecast errors can decrease or initially increase and then decrease with the forecast horizon. We initially proof that, if the variable to forecast can be described by a generalized Rayleigh distribution, its conditional mean does in general not constitute the optimal prediction under a symmetric target zone loss function. Subsequently, we approximate the target zone loss function to show the potential for variation in optimal bias over the forecast horizon.
KW - efficient markets
KW - forecast evaluation
KW - loss function
KW - rationality
U2 - 10.1111/j.1467-8586.2010.00383.x
DO - 10.1111/j.1467-8586.2010.00383.x
M3 - Journal article
VL - 65
SP - 362
EP - 371
JO - Bulletin of Economic Research
JF - Bulletin of Economic Research
SN - 0307-3378
IS - 4
ER -