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A Reduced Rank Regression Approach to Coincident and Leading Indexes Building

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  • Gianluca Cubadda

Abstract

This paper proposes a reduced rank regression framework for constructing a coincident index (CI) and a leading index (LI). Based on a formal definition that requires that the first differences of the LI are the best linear predictor of the first differences of the CI, it is shown that the notion of polynomial serial correlation common features can be used to build these composite variables. Concepts and methods are illustrated by an empirical investigation of the US business cycle indicators. Copyright Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2007.

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 69 (2007)
Issue (Month): 2 (04)
Pages: 271-292

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Handle: RePEc:bla:obuest:v:69:y:2007:i:2:p:271-292

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References

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  1. Rebecca A Emerson & David Hendry, 1994. "An evaluation of forecasting using leading indicators," Economics Papers 5., Economics Group, Nuffield College, University of Oxford.
  2. Cubadda, Gianluca & Hecq, Alain, 2001. "On non-contemporaneous short-run co-movements," Economics Letters, Elsevier, vol. 73(3), pages 389-397, December.
  3. James H. Stock & Mark W. Watson, 1993. "A Procedure for Predicting Recessions with Leading Indicators: Econometric Issues and Recent Experience," NBER Chapters, in: Business Cycles, Indicators and Forecasting, pages 95-156 National Bureau of Economic Research, Inc.
  4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  5. Cubadda, Gianluca, 1999. "Common Cycles in Seasonal Non-stationary Time Series," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(3), pages 273-91, May-June.
  6. Wecker, William E, 1979. "Predicting the Turning Points of a Time Series," The Journal of Business, University of Chicago Press, vol. 52(1), pages 35-50, January.
  7. Hecq, Alain & Palm, Franz C & Urbain, Jean-Pierre, 2000. " Permanent-Transitory Decomposition in VAR Models with Cointegration and Common Cycles," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(4), pages 511-32, September.
  8. Maximo Camacho & Gabriel Perez-Quiros, 2002. "This is what the leading indicators lead," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(1), pages 61-80.
  9. Granger, Clive W.J. & YOON, GAWON, 2001. "Self-Generating Variables in a Cointegrated VAR Framework," University of California at San Diego, Economics Working Paper Series qt6010k0xn, Department of Economics, UC San Diego.
  10. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 369-80, October.
  11. Anders Rahbek & Rocco Mosconi, 1999. "Cointegration rank inference with stationary regressors in VAR models," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 76-91.
  12. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  13. Camba-Mendez, Gonzalo, et al, 2003. "Tests of Rank in Reduced Rank Regression Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 145-55, January.
  14. n/a, 2001. "A Comparison of Personal Sector Saving Rates in the UK, US and Italy," NIESR Discussion Papers 150, National Institute of Economic and Social Research.
  15. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(4), pages 393-95, October.
  16. Proietti, Tommaso, 1997. "Short-Run Dynamics in Cointegrated Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(3), pages 405-22, August.
  17. Hamilton, James D & Perez-Quiros, Gabriel, 1996. "What Do the Leading Indicators Lead?," The Journal of Business, University of Chicago Press, vol. 69(1), pages 27-49, January.
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Cited by:
  1. Gianluca Cubadda & Barbara Guardabascio & Alain Hecq, 2012. "A General to Specific Approach for Constructing Composite Business Cycle Indicators," CEIS Research Paper 224, Tor Vergata University, CEIS, revised 27 Feb 2012.
  2. Centoni, Marco & Cubadda, Gianluca & Hecq, Alain, 2007. "Common shocks, common dynamics, and the international business cycle," Economic Modelling, Elsevier, vol. 24(1), pages 149-166, January.
  3. Hassan Mohammadi & Daniel Rich, 2013. "Dynamics of Unemployment Insurance Claims: An Application of ARIMA-GARCH Models," Atlantic Economic Journal, International Atlantic Economic Society, vol. 41(4), pages 413-425, December.
  4. Cubadda, Gianluca, 2007. "A unifying framework for analysing common cyclical features in cointegrated time series," Computational Statistics & Data Analysis, Elsevier, vol. 52(2), pages 896-906, October.

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