Are Forecast Combinations Efficient?

Pablo M. Pincheira
2012 Social Science Research Network  
It is well known that weighted averages of two competing forecasts may reduce Mean Squared Prediction Errors (MSPE) and may also introduce certain inefficiencies. In this paper we take an in-depth view of one particular type of inefficiency stemming from simple combination schemes. We identify testable conditions under which every linear convex combination of two forecasts displays this type of inefficiency. In particular, we show that the process of taking averages of forecasts may induce
more » ... sts may induce inefficiencies in the combination, even when the individual forecasts are efficient. Furthermore, we show that the so-called
doi:10.2139/ssrn.2039670 fatcat:vusd5ilp35e2jhhj3r7cntsng4