Forecasting: Accuracy and Evaluation

  • Phoebus Dhrymes


Economists and financial economists have forecast time series and measured business cycles for over one hundred years. The research culminating to the leading economic indicators was developed to serve as a barometer of economic activity. In the previous chapter, the reader was introduced to time series modeling and the LEI data. Economists forecast mostly macroeconomic time many series. Gross Domestic Product (GDP), measuring the market value of goods and services produced, is the most important series. Do macroeconomic data follow a random walk, or a random walk with drift? Economists forecast GDP to identify turning points in the time series and to answer has the recession ended? Economists and statisticians debate what time series models and methods are the most accurate for forecasting, and debate accuracy measurements. In this chapter, the topics addressed include: (1) how well do forecasts work and how does one measure forecast accuracy? (2) trend-line fitting and forecasting; (3) forecasting from time series models; (4) regression models and econometric models; (5) leading indicators; (6) combination of forecasts; and (7) survey of forecasters. People forecast when they make an estimate as to the future value of a time series. An accurate forecast can aid policy makers in deciding the relative important of monetary and fiscal policies; corporations in strategic planning and resource allocation; and asset managers in creating and managing portfolios using mispriced stocks. What information is necessary for forecasts, but how can information be used; how should it be selected; how should models use the information, and what role should information play in the models? A very important question is what is an appropriate benchmark? Is it a no-change model? Is the relevant forecasting benchmark a random walk with drift model, a naïve statistically-based model?


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© Springer International Publishing AG 2017

Authors and Affiliations

  • Phoebus Dhrymes
    • 1
  1. 1.New YorkUSA

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