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Forecasting Using a Large Number of Predictors: Is Bayesian Regression a Valid Alternative to Principal Components?

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  • De Mol, Christine
  • Giannone, Domenico
  • Reichlin, Lucrezia

Abstract

This paper considers Bayesian regression with normal and double exponential priors as forecasting methods based on large panels of time series. We show that, empirically, these forecasts are highly correlated with principal component forecasts and that they perform equally well for a wide range of prior choices. Moreover, we study the asymptotic properties of the Bayesian regression under Gaussian prior under the assumption that data are quasi collinear to establish a criterion for setting parameters in a large cross-section.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5829.

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Date of creation: Sep 2006
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Handle: RePEc:cpr:ceprdp:5829

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Keywords: Bayesian VAR; large cross-sections; Lasso regression; principal components; ridge regressions;

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References

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  7. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2003. "The Generalized Dynamic Factor Model. One-Sided Estimation and Forecasting," LEM Papers Series 2003/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  8. Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary policy in real time," ULB Institutional Repository 2013/6401, ULB -- Universite Libre de Bruxelles.
    • Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 161-224 National Bureau of Economic Research, Inc.
  9. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2338, C.E.P.R. Discussion Papers.
  10. Chamberlain, Gary & Rothschild, Michael, 1982. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," Scholarly Articles 3230355, Harvard University Department of Economics.
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  12. Fernandez, Carmen & Ley, Eduardo & Steel, Mark F. J., 2001. "Benchmark priors for Bayesian model averaging," Journal of Econometrics, Elsevier, Elsevier, vol. 100(2), pages 381-427, February.
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  14. Raffaella Giacomini & Halbert White, 2003. "Tests of conditional predictive ability," Boston College Working Papers in Economics 572, Boston College Department of Economics.
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  16. D''Agostino, Antonello & Giannone, Domenico & Surico, Paolo, 2007. "(Un)Predictability and Macroeconomic Stability," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6594, C.E.P.R. Discussion Papers.
  17. 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.
  18. Gary Koop & Simon Potter, 2003. "Forecasting in Large Macroeconomic Panels using Bayesian Model Averaging," Discussion Papers in Economics 04/16, Department of Economics, University of Leicester.
  19. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(06), pages 1113-1141, December.
  20. Jushan Bai & Serena Ng, 2006. "Confidence Intervals for Diffusion Index Forecasts and Inference for Factor-Augmented Regressions," Econometrica, Econometric Society, Econometric Society, vol. 74(4), pages 1133-1150, 07.
  21. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, Econometric Society, vol. 71(1), pages 135-171, January.
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  23. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
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