Advanced Search
MyIDEAS: Login to save this paper or follow this series

Improved forecasting with leading indicators: the principal covariate index

Contents:

Author Info

  • Heij, C.
Registered author(s):

    Abstract

    We propose a new method of leading index construction that combines the need for data compression with the objective of forecasting. This so-called principal covariate index is constructed to forecast growth rates of the Composite Coincident Index. The forecast performance is compared with an alternative index based on principal components and with the Composite Leading Index of the Conference Board. The results show that the new index, which takes the forecast objective explicitly into account, provides significant gains over other single-index methods, both in terms of forecast accuracy and in terms of predicting recession probabilities.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://repub.eur.nl/pub/10348/EI2007-23_paper.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2007-23.

    as in new window
    Length:
    Date of creation: 21 Jun 2007
    Date of revision:
    Handle: RePEc:ems:eureir:10348

    Contact details of provider:
    Postal: Postbus 1738, 3000 DR Rotterdam
    Phone: 31 10 4081111
    Web page: http://www.eur.nl/ese
    More information through EDIRC

    Related research

    Keywords: business cycles; index construction; principal covariate; principal component; time series forecasting; turning points;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    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.:
    as in new window
    1. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc.
    2. Lown, Cara & Morgan, Donald P., 2004. "The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey," SIFR Research Report Series, Institute for Financial Research 27, Institute for Financial Research.
    3. Issler, João Victor & Vahid, Farshid, 2003. "The missing link: Using the NBER recession indicator to construct coincident and leading indices of economic activity," Economics Working Papers (Ensaios Economicos da EPGE) 492, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    4. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
    5. Mototsugu Shintani, 2010. "Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan," Levine's Working Paper Archive 506439000000000168, David K. Levine.
    6. Anindya Banerjee & Massimiliano Marcellino, 2003. "Are There Any Reliable Leading Indicators for U.S. Inflation and GDP Growth?," Working Papers 236, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Jean Boivin & Serena Ng, 2005. "Understanding and Comparing Factor-Based Forecasts," NBER Working Papers 11285, National Bureau of Economic Research, Inc.
    8. 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.
    9. Hamilton, James D & Perez-Quiros, Gabriel, 1996. "What Do the Leading Indicators Lead?," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 69(1), pages 27-49, January.
    10. Charles L. Evans & Chin Te Liu & Genevieve Pham-Kanter, 2002. "The 2001 recession and the Chicago Fed National Index: identifying business cycle turning points," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q III, pages 26-43.
    11. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(1), pages 387-422, January.
    12. Carriero, Andrea & Marcellino, Massimiliano, 2007. "A comparison of methods for the construction of composite coincident and leading indexes for the UK," International Journal of Forecasting, Elsevier, Elsevier, vol. 23(2), pages 219-236.
    13. Chauvet, Marcelle & Piger, Jeremy, 2008. "A Comparison of the Real-Time Performance of Business Cycle Dating Methods," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 26, pages 42-49, January.
    14. Wesley C. Mitchell & Solomon Fabricant, 1938. "Statistical Indicators of Cyclical Revivals," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number mitc38-1.
    15. Marcelle Chauvet & James D. Hamilton, 2005. "Dating Business Cycle Turning Points," NBER Working Papers 11422, National Bureau of Economic Research, Inc.
    16. Bair, Eric & Hastie, Trevor & Paul, Debashis & Tibshirani, Robert, 2006. "Prediction by Supervised Principal Components," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 101, pages 119-137, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ems:eureir:10348. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePub).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.