Combination forecasting for directional accuracy: An application to survey interest rate forecasts

Using published interest rates forecasts issued by professional economists, two combination forecasts designed to improve the directional accuracy of interest rate forecasting are constructed. The first combination forecast takes a weighted average of the individual forecasters' predictions. The more successful the forecaster was in past forecasts at predicting the direction of change in interest rates, the greater is the weight given to his/her current forecast. The second combination forecast is simply the forecast issued by the forecaster who had the greatest success rate at predicting the direction of change in interest rates in previous forecasts. In cases where two or more forecasters tie for best historic directional accuracy track record, the arithmetic mean of these forecasters is used. The study finds that neither combination forecasting method performs better than coin-flipping at predicting the direction of change in interest rates. Nor does either method beat the simple arithmetic mean of the predictions of all the forecasters surveyed at predicting the direction of change in interest rates.