An Embarrassment of Riches: Forecasting Using Large Panels
AbstractThe increasing availability of data and potential predictor variables poses new challenges to forecasters. The task of formulating a single forecasting model that can extract all the relevant information is becoming increasingly difficult in the face of this abundance of data. The two leading approaches to addressing this "embarrassment of riches" are philosophically distinct. One approach builds forecast models based on summaries of the predictor variables, such as principal components, and the second approach is analogous to forecast combination, where the forecasts from a multitude of possible models are averaged. Using several data sets we compare the performance of the two approaches in the guise of the diffusion index or factor models popularized by Stock and Watson and forecast combination as an application of Bayesian model averaging. We find that none of the methods is uniformly superior and that no method performs better than, or is outperformed by, a simple AR(p) process.
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Bibliographic InfoPaper provided by Örebro University, School of Business in its series Working Papers with number 2007:1.
Length: 27 pages
Date of creation: 31 Mar 2007
Date of revision:
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Postal: Örebro University School of Business, SE - 701 82 ÖREBRO, Sweden
Phone: 019-30 30 00
Fax: 019-33 25 46
Web page: http://www.oru.se/Institutioner/Handelshogskolan-vid-Orebro-universitet/
More information through EDIRC
Bayesian model averaging; Diffusion indexes; GDP growth rate; Inflation rate;
Other versions of this item:
- Jana Eklund & Sune Karlsson, 2007. "An Embarrassment of Riches: Forecasting Using Large Panels," Economics wp34, Department of Economics, Central bank of Iceland.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-21 (All new papers)
- NEP-CBA-2007-04-21 (Central Banking)
- NEP-ECM-2007-04-21 (Econometrics)
- NEP-ETS-2007-04-21 (Econometric Time Series)
- NEP-FOR-2007-04-21 (Forecasting)
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.:
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