No-Regret Forecasting with Egalitarian Committees

TL;DR

This paper introduces HECA, a novel forecast combination method that forms egalitarian committees using ridge regression and hedge algorithms, demonstrating superior performance over equal-weight schemes during economic downturns.

Contribution

The paper proposes HECA, a new forecast combination approach that leverages egalitarian committees and hedge algorithms, with proven no-regret properties and practical effectiveness.

Findings

HECA outperforms equal-weight schemes during COVID-19 recession.

Egalitarian committees are formed via ridge regression with shrinkage.

HECA has the no-regret property, ensuring competitive performance.

Abstract

The forecast combination puzzle is often found in literature: The equal-weight scheme tends to outperform sophisticated methods of combining individual forecasts. Exploiting this finding, we propose a hedge egalitarian committees algorithm (HECA), which can be implemented via mixed integer quadratic programming. Specifically, egalitarian committees are formed by the ridge regression with shrinkage toward equal weights; subsequently, the forecasts provided by these committees are averaged by the hedge algorithm. We establish the no-regret property of HECA. Using data collected from the ECB Survey of Professional Forecasters, we find the superiority of HECA relative to the equal-weight scheme during the COVID-19 recession.