Generic Conditions for Forecast Dominance

Krüger, Fabian; Ziegel, Johanna F. (2020). Generic Conditions for Forecast Dominance. Journal of Business and Economic Statistics, 39(4), pp. 972-983. Taylor & Francis 10.1080/07350015.2020.1741376

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Recent studies have analyzed whether one forecast method dominates another under a class of consistent scoring functions. While the existing literature focuses on empirical tests of forecast dominance, little is known about the theoretical conditions under which one forecast dominates another. To address this question, we derive a new characterization of dominance among forecasts of the mean functional. We present various scenarios under which dominance occurs. Unlike existing results, our results allow for the case that the forecasts’ underlying information sets are not nested, and allow for uncalibrated forecasts that suffer, e.g., from model misspecification or parameter estimation error. We illustrate the empirical relevance of our results via data examples from finance and economics.

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