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Download the Paper (476 K, PDF file) - April 29, 2002 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.

ABSTRACT:
Existing results on the properties and performance of forecast combinations have been derived in the context of mean squared error loss. Under this loss function empirical studies have generally found that estimates of optimal forecast combination weights lead to higher losses than equally-weighted combined forecasts which in turn outperform the best individual predictions. We show that this and other results can be overturned when asymmetries are introduced in the loss function and the forecast error distribution is skewed. We characterize the optimal combination weights for the most commonly used alternatives to mean squared error loss and demonstrate how the degree of asymmetry in the loss function and skews in the underlying forecast error distribution can significantly change the optimal combination weights. We also propose estimation methods and investigate their small sample properties in simulations and in an inflation forecasting exercise.

SUGGESTED CITATION:
Graham Elliott and Allan Timmermann, "Optimal Forecast Combination Under General Loss Functions and Forecast Error Distributions" (April 29, 2002). Department of Economics, UCSD. Paper 2002-08.
http://repositories.cdlib.org/ucsdecon/2002-08