Empirically-transformed linear opinion pools

Vol: 
47/2019
Author name: 
Garratt A
Henckel T
Vahey SP
Year: 
2019
Month: 
July
Abstract: 

Many studies have found that combining density forecasts improves predictive accuracy for macroeconomic variables. A prevalent approach known as the Linear Opinion Pool (LOP) combines forecast densities from “experts”; see, among others, Stone (1961), Geweke and Amisano (2011), Kascha and Ravazzolo (2011), Ranjan and Gneiting (2010) and Gneiting and Ranjan (2013). Since the LOP approach averages the experts’ probabilistic assessments, the distribution of the combination generally differs from the marginal distributions of the experts. As a result, the LOP combination forecasts sometimes fail to match salient features of the sample data, including asymmetries in risk. In this paper, we propose a computationally convenient transformation for a target macroeconomic variable with an asymmetric marginal distribution. Our methodology involves a Smirnov transform to reshape the LOP combination forecasts using a nonparametric kernel-smoothed empirical cumulative distribution function. We illustrate our methodology with an application examining quarterly real-time forecasts for US inflation based on multiple output gap measures over an evaluation sample from 1990:1 to 2017:2. Our proposed methodology improves combination forecast performance by approximately 10% in terms of both the root mean squared forecast error and the continuous ranked probability score. We find that our methodology delivers a similar performance gain for the Logarithmic Opinion Pool (LogOP), a commonly-used alternative to the LOP.

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