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Why Do Pooled Forecasts Do Better Than Individual Forecasts Ex Post?

Author

Listed:
  • Diego Nocetti

    (Clarkson University)

  • William T. Smith

    (The University of Memphis)

Abstract

Pooled forecasts frequently outperform individual forecasts of economic time series. This paper shows that the introduction of model uncertainty into the formation of expectations can account for the regularity. We conjecture that agents learn in a Bayesian way, using an optimally designed combination of forecasts to form expectations. When these expectations alter the ex-post realization of the data generating mechanism the pooled forecast may dominate the best individual device.

Suggested Citation

  • Diego Nocetti & William T. Smith, 2006. "Why Do Pooled Forecasts Do Better Than Individual Forecasts Ex Post?," Economics Bulletin, AccessEcon, vol. 4(36), pages 1-7.
    • Handle: RePEc:ebl:ecbull:eb-06d80016
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    File URL: http://www.accessecon.com/pubs/EB/2006/Volume4/EB-06D80016A.pdf
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    References listed on IDEAS

    as
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    4. Min, Chung-ki & Zellner, Arnold, 1993. "Bayesian and non-Bayesian methods for combining models and forecasts with applications to forecasting international growth rates," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 89-118, March.
    5. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April.
    6. Avramov, Doron, 2002. "Stock return predictability and model uncertainty," Journal of Financial Economics, Elsevier, vol. 64(3), pages 423-458, June.
    7. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
    8. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, vol. 94(4), pages 813-835, September.
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    Cited by:

    1. Nikolsko-Rzhevskyy, Alex, 2008. "Monetary Policy Evaluation in Real Time: Forward-Looking Taylor Rules Without Forward-Looking Data," MPRA Paper 11352, University Library of Munich, Germany.

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    More about this item

    Keywords

    Expectations;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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