LAUSR

Empirical studies in the forecast combination literature have shown that it is notoriously difficult to improve upon the simple average despite the availability of optimal combination weights. In particular, historical performance-based combination approaches do not select forecasters that improve upon the simple average going forward. This paper shows that this is due to the high correlation among forecasters, which only by chance causes some individuals to have lower root-mean-squared error (RMSE) than the simple average. We introduce a new nonparametric approach to eliminate forecasters who perform well based on chance as well as poor performers. This leaves a subset of forecasters with better performance in subsequent periods. The average of this group improves upon the simple average in the SPF particularly for bond yields where some forecasters may be more likely to have superior forecasting ability.