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Comparing Alternative Predictors Based on Large‐Panel Factor Models

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  • Antonello D’ Agostino
  • Domenico Giannone

Abstract

This paper compares the predictive ability of the factor models of Stock and Watson (2002) and Forni, Hallin, Lippi, and Reichlin (2005) using a large panel of US macroeconomic variables. We propose a nesting procedure of comparison that clarifies and partially overturns the results of similar exercises in the literature. Our main conclusion is that for the dataset at hand the two methods have a similar performance and produce highly collinear forecasts.

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File URL: http://hdl.handle.net/10.1111/j.1468-0084.2011.00642.x
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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): 74 (2012)
Issue (Month): 2 (04)
Pages: 306-326

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Handle: RePEc:bla:obuest:v:74:y:2012:i:2:p:306-326

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References

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  1. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 17(06), pages 1113-1141, December.
  2. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2005. "Nowcasting GDP and Inflation: The Real Time Informational Content of Macroeconomic Data Releases," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5178, C.E.P.R. Discussion Papers.
  3. Christian Schumacher, 2007. "Forecasting German GDP using alternative factor models based on large datasets," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 26(4), pages 271-302.
  4. Mario Forni & Domenico Giannone & Marco Lippi & Lucrezia Reichlin, 2008. "Opening the Black Box: Structural Factor Models with Large Cross-Sections," Working Papers ECARES, ULB -- Universite Libre de Bruxelles 2008_036, ULB -- Universite Libre de Bruxelles.
  5. Mario Forni & Lucrezia Reichlin, 1998. "Let's get real: a factor analytical approach to disaggregated business cycle dynamics," ULB Institutional Repository 2013/10147, ULB -- Universite Libre de Bruxelles.
  6. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2005. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 100, pages 830-840, September.
  7. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
  8. Chamberlain, Gary & Rothschild, Michael, 1983. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Econometrica, Econometric Society, Econometric Society, vol. 51(5), pages 1281-304, September.
  9. Antonello D'Agostino & Domenico Giannone & Paolo Surico, 2005. "(Un)Predictability and Macroeconomic Stability," Macroeconomics, EconWPA 0510024, EconWPA.
  10. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  11. Jean Boivin & Serena Ng, 2005. "Understanding and Comparing Factor-Based Forecasts," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  12. Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
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