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Can we use seasonally adjusted indicators in dynamic factor models?

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  • Maximo Camacho

    ()
    (Universidad de Murcia)

  • Yuliya Lovcha

    (Universidad de Navarra)

  • Gabriel Perez-Quiros

    ()
    (Banco de España)

Abstract

We 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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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1235e.pdf
File Function: First version, October 2012
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1235.

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Length: 33 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:bde:wpaper:1235

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Keywords: Dynamic factor models; seasonal adjustment; short-term forecasting;

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