A nonparametric evaluation of the optimality of German export and import growth forecasts under flexible loss

Abstract

This study contributes to research on the nonparametric evaluation of German trade forecasts. To this end, I compute random classification and regression forests to analyze the optimality of annual German export and import growth forecasts from 1970 to 2017. A forecast is considered as optimal if a set of predictors, which models the information set of a forecaster at the time of forecast formation, has no explanatory power for the corresponding (sign of the) forecast error. I analyze trade forecasts of four major German economic research institutes, a collaboration of German economic research institutes, and one international forecaster. For trade forecasts with a horizon of half-a-year, I cannot reject forecast optimality for all but one forecaster. In the case of a forecast horizon of one year, forecast optimality is rejected in more cases if the underlying loss function is assumed to be quadratic. Allowing for a flexible loss function results in more favorable assessment of forecast optimality.