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Forecasters’ utility and forecast coherence

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  • Emilio Zanetti Chini

    (University of Pavia and CREATES)

Abstract

We introduce a new definition of probabilistic forecasts’ coherence based on the divergence between forecasters’ expected utility and their own models’ likelihood function. When the divergence is zero, this utility is said to be local. A new micro-founded forecasting environment, the “Scoring Structure”, where the forecast users interact with forecasters, allows econometricians to build a formal test for the null hypothesis of locality. The test behaves consistently with the requirements of the theoretical literature. The locality is fundamental to set dating algorithms for the assessment of the probability of recession in U.S. business cycle and central banks’ “fan” charts.

Suggested Citation

  • Emilio Zanetti Chini, 2018. "Forecasters’ utility and forecast coherence," CREATES Research Papers 2018-23, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2018-23
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    More about this item

    Keywords

    Business Cycle; Fan Charts; Locality Testing; Smooth Transition Auto-Regressions; Predictive Density; Scoring Rules and Structures;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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