Can we use seasonally adjusted indicators in dynamic factor models?
AbstractWe examine the short-term performance of two alternative approaches of forecasting from 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 non seasonally 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 the that the common practice of using seasonally adjusted data in this type of models is very accurate in terms of forecasting ability. Using five coincident indicators, we illustrate this result for US data.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9191.
Date of creation: Oct 2012
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Other versions of this item:
- Maximo Camacho & Yuliya Lovcha & Gabriel Perez-Quiros, 2012. "Can we use seasonally adjusted indicators in dynamic factor models?," Banco de Espaï¿½a Working Papers 1235, Banco de Espa�a.
- 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
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-03 (All new papers)
- NEP-ETS-2012-11-03 (Econometric Time Series)
- NEP-FOR-2012-11-03 (Forecasting)
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