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On Selection of Components for a Diffusion Index Model: It's not the Size, It's How You Use It

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  • Boriss Siliverstovs
  • Konstantin A. Kholodilin

Abstract

This paper suggests a novel approach to pre-selection of the component series of the diffusion index based on their individual forecasting performance. It is shown that this targeted selection allows substantially improving the forecasting ability compared to the diffusion index models that are based on the largest available dataset.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44424.de/dp598.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 598.

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Length: 18 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp598

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Keywords: Diffusion index; forecasting; optimal subset of data;

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References

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  1. Christian Schumacher, 2007. "Forecasting German GDP using alternative factor models based on large datasets," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 26(4), pages 271-302.
  2. Marc Brisson & Bryan Campbell & John Galbraith, 2001. "Forecasting Some Low-Predictability Time Series Using Diffusion Indices," CIRANO Working Papers, CIRANO 2001s-46, CIRANO.
  3. Raffaella Giacomini & Halbert White, 2006. "Tests of Conditional Predictive Ability," Econometrica, Econometric Society, Econometric Society, vol. 74(6), pages 1545-1578, November.
  4. Michael ARTIS & Anindya BANERJEE & Massimiliano MARCELLINO, 2001. "Factor Forecasts for the UK," Economics Working Papers, European University Institute ECO2001/15, European University Institute.
  5. Shintani, Mototsugu, 2005. "Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(3), pages 517-38, June.
  6. Todd Clark & Michael McCracken, 2005. "Evaluating Direct Multistep Forecasts," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 24(4), pages 369-404.
  7. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 147-62, April.
  8. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
  9. Israel Sancho & maximo Camacho, 2002. "Spanish diffusion indexes," Computing in Economics and Finance 2002, Society for Computational Economics 276, Society for Computational Economics.
  10. George Kapetanios & Massimiliano Marcellino, 2009. "A parametric estimation method for dynamic factor models of large dimensions," Journal of Time Series Analysis, Wiley Blackwell, vol. 30(2), pages 208-238, 03.
  11. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2004. "The generalised dynamic factor model: consistency and rates," ULB Institutional Repository 2013/10133, ULB -- Universite Libre de Bruxelles.
  12. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, Elsevier, vol. 13(2), pages 281-291, June.
  13. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 1998. "Tests for Forecast Encompassing," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 16(2), pages 254-59, April.
  14. Martin Schneider & Martin Spitzer, 2004. "Forecasting Austrian GDP using the generalized dynamic factor model," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 89, Oesterreichische Nationalbank (Austrian Central Bank).
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Cited by:
  1. Boriss Siliverstovs & Konstantin A. Kholodilin, 2010. "Assessing the Real-Time Informational Content of Macroeconomic Data Releases for Now-/Forecasting GDP: Evidence for Switzerland," KOF Working papers, KOF Swiss Economic Institute, ETH Zurich 10-251, KOF Swiss Economic Institute, ETH Zurich.
  2. Christian Schumacher, 2011. "Forecasting with Factor Models Estimated on Large Datasets: A Review of the Recent Literature and Evidence for German GDP," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 231(1), pages 28-49, February.

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