Target alignment, dilution and forecast selection when cross-sectional forecasts share a common target

Masoud Soleimani

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arXiv · 2609.26303

Target alignment, dilution and forecast selection when cross-sectional forecasts share a common target

Masoud Soleimani

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Abstract

Forecasters often score the same units per date against one standardized realized outcome. We show that every standardized forecast splits exactly into a component aligned with this common target and a component uncorrelated with it. Three consequences follow: forecast-error correlation largely mirrors forecast correlation and is therefore a poor measure of diversity; an equally weighted combination beats a no-information forecast only when average alignment is large relative to the combination's dispersion; and the gain from adding a forecaster separates into genuine improvement and mere dilution, which equal-weight admission can mistakenly reward. We develop a cautious selection rule, study it in simulations, and apply it to language-model forecasts of US equity rankings and mechanical signals ranking exchange-traded funds. Selection removes most dilution losses, but no combination beats the no-information forecast.

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econ.EM cs.LG q-fin.ST stat.ME

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Masoud Soleimani. 2026-09-22. Target alignment, dilution and forecast selection when cross-sectional forecasts share a common target. https://arxiv.org/abs/2609.26303

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