On the Selection of Error Measures for Comparisons Among Forecasting Methods

Abstract

Clements and Hendry (1993) proposed the Generalized Forecast Error Second Moment (GFESM) as an improvement to the Mean Square Error in comparing forecasting performance across data series. They based their conclusion on the fact that rankings based on GFESM remain unaltered if the series are linearly transformed. In this paper, we argue that this evaluation ignores other important criteria. Also, their conclusions were illustrated by a simulation study whose relationship to real data was not obvious. Thirdly, prior empirical studies show that the mean square error is an inappropriate measure to serve as a basis for comparison. This undermines the claims made for the GFESM. KEY WORDS Accuracy Forecast evaluation Loss functions Introduction Presumably, one engages in theoretical manipulations and simulations in order to make generalizations about the real world. The purpose of Clements and Hendry (1993) (henceforth referred to as C&H) was to make generalizations about the best metric fo...

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