Some Statistical Results in the Combination of Forecasts

Abstract

Forecasts may be combined using a minimum variance criterion to yield a composite forecast of smaller error variance than any of the components. This paper considers the sampling distributions of the weights to be attached to the components and of the error variance of the combined forecast. Confidence limits are derived for the estimates of the weights and of the variance of a composite forecast with two components. The theoretical analysis reveals that, in practice, it is doubtful whether combined forecasts offer much improvement because of the unreliability of the weight estimates.