Comparing forecasting performance in cross-sections

This paper develops new methods for pairwise comparisons of predictive accuracy with cross-sectional data. Using a common factor setup, we establish conditions on cross-sectional dependencies in forecast errors which allow us to test the null of equal predictive accuracy on a single cross-section of forecasts. We consider both unconditional tests of equal predictive accuracy as well as tests that condition on the realization of common factors and show how to decompose forecast errors into exposures to common factors and idiosyncratic components. An empirical application compares the predictive accuracy of financial analysts’ short-term earnings forecasts across six brokerage firms.