The paper addresses the issue of forecasting a large set of variables using multivariate models. In particular, we propose three alternative reduced rank forecasting models and compare their predictive performance for US time series with the most promising existing alternatives, namely, factor models, large scale Bayesian VARs, and multivariate boosting. Speci.cally, we focus on classical reduced rank regression, a two-step procedure that applies, in turn, shrinkage and reduced rank restrictions, and the reduced rank Bayesian VAR of Geweke (1996). We .nd that using shrinkage and rank reduction in combination rather than separately improves substantially the accuracy of forecasts, both when the whole set of variables is to be forecast, and for key variables such as industrial production growth, inflation, and the federal funds rate. The robustness of this finding is confirmed by a Monte Carlo experiment based on bootstrapped data. We also provide a consistency result for the reduced rank regression valid when the dimension of the system tends to infinity, which opens the ground to use large scale reduced rank models for empirical analysis.
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Paper provided by European University Institute in its series Economics Working Papers with number
ECO2009/31.
Length: Date of creation: 2009 Date of revision: Handle: RePEc:eui:euiwps:eco2009/31
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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.:
James D. Hamilton & Daniel F. Waggoner & Tao Zha, 2007.
"Normalization in Econometrics,"
Econometric Reviews,
Taylor and Francis Journals, vol. 26(2-4), pages 221-252.
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