Alternative Measures of Forecasting Accuracy

Abstract

Alternative measures of forecasting accuracy include direction accuracy, the adjusted root mean square error, profitability and proximity to a perfect forecast. The results demonstrate that the random walk can be outperformed in exchange rate forecasting when forecasting accuracy is assessed in terms of measures that take into account more than just the magnitude of the forecasting error. Evaluating forecasting accuracy by using alternative measures leads to vastly different conclusions from those reached by using conventional measures such as the root mean square error. The three models produce better forecasts than the random walk when evaluated in terms of alternative criteria. This is a potential explanation for the Meese-Rogoff puzzle.