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The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting

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Author Info
Forni, Mario
Hallin, Marc
Lippi, Marco
Reichlin, Lucrezia

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Abstract

This Paper proposes a new forecasting method that exploits information from a large panel of time series. The method is based on the generalized dynamic factor model proposed in Forni, Hallin, Lippi, and Reichlin (2000), and takes advantage of the information on the dynamic covariance structure of the whole panel. We first use our previous method to obtain an estimation for the covariance matrices of common and idiosyncratic components. The generalized eigenvectors of this couple of matrices are then used to derive a consistent estimate of the optimal forecast, which is constructed as a linear combination of present and past observations only (one-sided filter). This two-step approach solves the end-of-sample problems caused by two-sided filtering (as in our previous work), while retaining the advantages of an estimator based on dynamic information. Both simulation results and an empirical illustration on the forecast of the Euro area industrial production and inflation, based on a panel of 447 monthly time series show very encouraging results.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3432.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3432

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Related research
Keywords: dynamic factor models forecasting large cross-sections panel data principal components time series

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Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Forni, Mario & Reichlin, Lucrezia, 1998. "Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics," Review of Economic Studies, Blackwell Publishing, vol. 65(3), pages 453-73, July. [Downloadable!] (restricted)
  2. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2004. "The generalized dynamic factor model consistency and rates," Journal of Econometrics, Elsevier, vol. 119(2), pages 231-255, April. [Downloadable!] (restricted)
  3. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Forni, Mario, et al, 2001. "Coincident and Leading Indicators for the Euro Area," Economic Journal, Royal Economic Society, vol. 111(471), pages C62-85, May. [Downloadable!] (restricted)
  5. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics. [Downloadable!]
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  6. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(06), pages 1113-1141, December. [Downloadable!]
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  7. Thomas J. Sargent & Christopher A. Sims, 1977. "Business cycle modeling without pretending to have too much a priori economic theory," Working Papers 55, Federal Reserve Bank of Minneapolis. [Downloadable!]
  8. Filippo Altissimo & Antonio Bassanetti & Riccardo Cristadoro & Mario Forni & Marco Lippi & Lucrezia Reichlin & Giovanni Veronese, 2001. "A real time coincident indicator of the euro area business cycle," Temi di discussione (Economic working papers) 436, Bank of Italy, Economic Research Department. [Downloadable!]
  9. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  10. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. D Quah & T Sargent, 1993. "A Dynamic Index Model for Large Cross Sections," CEP Discussion Papers 0132, Centre for Economic Performance, LSE.
    Other versions:
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