Outline of forecast theory using generalized cost functions

Abstract.

The cost functions used to form forecasts in practice may be quite different than the squared costs that is often assumed in forecast theory. The impact on evaluation procedures is determined and simple properties for the derivate of the cost function of the errors are found to provide simple tests of optimality. For a very limited class of situations are forecasts based on conditional means optimal, generally, the econometricians needs to provide the whole conditional predicted distribution. Implications for multi-step forecasts and the combination of forecasts are briefly considered.