COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 774 "Forecasting Efficiency: Concepts and Applications" William D. Nordhaus September 1985 The question of forecasting accuracy is, of course, one that has been the subject of
numerous investigations over the last two decades. The present study contributes to this
line of research in two ways. First, we introduce a new concept, called "forecast
efficiency," that measures the extent to which information is incorporated into
forecasts. This concept is closely related to concepts of efficiency used in the analysis
of stock and other financial markets. The paper proves two readily testable propositions
about efficient forecasts. Second, the empirical part of the study examines forecast
efficiency by looking at forecast revisions ("fixed-horizon forecasts"), rather
than a series of forecasts of different events ("rolling-horizon forecasts") as
is the case for most studies of forecasting. This new approach to estimation in certain
circumstances will provide a more powerful test of forecast efficiency. A number of
fixed-horizon forecasts are collected and these are tested for forecast efficiency. |
