Can we use seasonally adjusted indicators in dynamic factor models?
AbstractWe examine the short-term performance of two alternative approaches to forecasting using dynamic factor models. The first approach extracts the seasonal component of the individual indicators before estimating the dynamic factor model, while the alternative uses the nonseasonally adjusted data in a model that endogenously accounts for seasonal adjustment. Our Monte Carlo analysis reveals that the performance of the former is always comparable to or even better than that of the latter in all the simulated scenarios. Our results have important implications for the factor models literature because they show that the common practice of using seasonally adjusted data in this type of model is very accurate in terms of forecasting ability. Drawing on fi ve coincident indicators, we illustrate this result for US data
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Bibliographic InfoPaper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1235.
Length: 33 pages
Date of creation: Oct 2012
Date of revision:
Dynamic factor models; seasonal adjustment; short-term forecasting;
Other versions of this item:
- Camacho, Maximo & Lovcha, Yuliya & Pérez-Quirós, Gabriel, 2012. "Can we use seasonally adjusted indicators in dynamic factor models?," CEPR Discussion Papers 9191, C.E.P.R. Discussion Papers.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-20 (All new papers)
- NEP-ETS-2012-10-20 (Econometric Time Series)
- NEP-FOR-2012-10-20 (Forecasting)
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