The Economic Value of Business Cycle Forecasts for Potential Investors – Evidence from Germany

We evaluate the economic value of business cycle forecasts for potential investors on financial markets as opposed to statistical measures of forecasts accuracy. Taking Germany as an example, and based on annual data ranging from 1990 to 2016 covering 16 institutions and 18 different forecasts, we calculate the value of portfolios that actively react to business cycle forecasts and compare these values with the value of portfolios that are passively managed. We find that actively managed portfolios do not systemically outperform passively managed ones, while statistical measures suggest that forecasts are better than naive ones. Furthermore, statistical and economic measures of forecast quality often correlate negatively across forecasters. One main reason for the difference between the two views on forecast quality is that the economic value of a correct forecast changes during time. We check the robustness of our results by applying several trading rules referring to business cycle forecasts