Modeling Time-Varying Uncertainty of Multiple-Horizon Forecast Errors

RePEc Short ID: pcl55
ORCID iD: 0000-0002-4985-1709

Clark, Todd E.; McCracken, Michael W.; Mertens, Elmar

doi:10.26509/frbc-wp-201715r

Working Paper

Modeling Time-Varying Uncertainty of Multiple-Horizon Forecast Errors

Abstract: We estimate uncertainty measures for point forecasts obtained from survey data, pooling information embedded in observed forecast errors for different forecast horizons. To track time-varying uncertainty in the associated forecast errors, we derive a multiple-horizon specification of stochastic volatility. We apply our method to forecasts for various macroeconomic variables from the Survey of Professional Forecasters. Compared to constant variance approaches, our stochastic volatility model improves the accuracy of uncertainty measures for survey forecasts. Our method can also be applied to other surveys like the Blue Chip Consensus, or the Federal Open Market Committee?s Summary of Economic Projections.

Keywords: survey forecasts; fan charts; Stochastic volatility;

JEL Classification: C53; E37;

https://doi.org/10.26509/frbc-wp-201715r