Generalized Forecast Errors, A Change of Measure, and Forecast Optimality

This paper establishes properties of optimal forecasts under general loss functions, extending existing results obtained under speci…c functional forms and data generating processes. We propose a new method that changes the probability measure under which the well-known properties of optimal forecasts under mean squared error loss can be recovered. We illustrate the proposed methods through an empirical application to U.S. in‡ation forecasting.

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