DP12489 International evidence on professional interest rates forecasts: The impact of forecasting ability

Author(s): Alex Cukierman, Thomas Lustenberger
Publication Date: December 2017
Keyword(s): cross-country relation between forecast dispersion and uncertainty, Forecasting interest rates and bond yields, impact of forecasting ability on forecast formation
JEL(s): E47, G17
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12489

This paper develops a model of honest rational professional forecasters with different abilities and submits it to empirical verification using data on three and twelve months ahead forecasts of short term interest rates and of long term bond yields for up to 33 countries using data collected by Consensus Economics. The main finding is that, in many countries, less precise forecasters weigh public information more heavily than more precise forecasters who weigh their own private information relatively more heavily. One implication of this result is that less precise forecasters herd after more precise forecasters even in the absence of strategic considerations. The second part of the paper discusses and examines the cross-country relationships between measures of forecast uncertainty, dispersion of forecasts across individual forecasters and the variabilities of short term interest rates and of long term bonds. The main findings are: (i) Forecast uncertainty and dispersion are positively and significantly related across countries for both short rates and yields. (ii) A similar positive, albeit somewhat weaker, association is found between uncertainty and variability. (iii) Dispersion of short term interest rate forecasts and the variability of those rates are also positively associated. The paper also documents differences between the average forecasting errors of more and less able forecasters as well as substantial correlations between the forecast errors of different forecasters.