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Uncertainty and Heterogeneity in factor models forecasting

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  • Matteo Luciani
  • Libero Monteforte

Abstract

In this paper we propose to exploit the heterogeneity of forecasts produced by different model specifications to measure forecast uncertainty. Our approach is simple and intuitive. It consists in selecting all the models that outperform some benchmark model, and then to construct an empirical distribution of the forecasts produced by these models. We interpret this distribution as a measure of uncertainty. We perform a pseudo real-time forecasting exercise on a large database of Italian data from 1982 to 2009, showing case studies of our measure of uncertainty.

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File URL: http://www.dt.tesoro.it/export/sites/sitodt/modules/documenti_it/analisi_progammazione/working_papers/WP_N._5-2012.pdf
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Bibliographic Info

Paper provided by Department of the Treasury, Ministry of the Economy and of Finance in its series Working Papers with number 5.

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Length: 25
Date of creation: May 2012
Date of revision:
Handle: RePEc:itt:wpaper:wp2012-5

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Keywords: Factor models; Model uncertainty; Forecast combination; Density forecast.;

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  1. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2002. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," CEPR Discussion Papers 3432, C.E.P.R. Discussion Papers.
  2. Jean Boivin & Serena Ng, 2005. "Understanding and Comparing Factor-Based Forecasts," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  3. Sandra Eickmeier & Christina Ziegler, 2008. "How successful are dynamic factor models at forecasting output and inflation? A meta-analytic approach," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(3), pages 237-265.
  4. D''Agostino, Antonello & Giannone, Domenico, 2007. "Comparing Alternative Predictors Based on Large-Panel Factor Models," CEPR Discussion Papers 6564, C.E.P.R. Discussion Papers.
  5. Schumacher, Christian, 2009. "Factor forecasting using international targeted predictors: the case of German GDP," Discussion Paper Series 1: Economic Studies 2009,10, Deutsche Bundesbank, Research Centre.
  6. Anthony Tay & Kenneth F. Wallis, 2000. "Density Forecasting: A Survey," Econometric Society World Congress 2000 Contributed Papers 0370, Econometric Society.
  7. Christian Schumacher, 2007. "Forecasting German GDP using alternative factor models based on large datasets," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 26(4), pages 271-302.
  8. Alexei Onatski, 2009. "Testing Hypotheses About the Number of Factors in Large Factor Models," Econometrica, Econometric Society, vol. 77(5), pages 1447-1479, 09.
  9. Ard H.J. den Reijer, 2005. "Forecasting Dutch GDP using Large Scale Factor Models," DNB Working Papers 028, Netherlands Central Bank, Research Department.
  10. Calista Cheung & Frédérick Demers, 2007. "Evaluating Forecasts from Factor Models for Canadian GDP Growth and Core Inflation," Working Papers 07-8, Bank of Canada.
  11. Hallin, Marc & Liska, Roman, 2007. "Determining the Number of Factors in the General Dynamic Factor Model," Journal of the American Statistical Association, American Statistical Association, vol. 102, pages 603-617, June.
  12. Alessi, Lucia & Barigozzi, Matteo & Capasso, Marco, 2010. "Improved penalization for determining the number of factors in approximate factor models," Statistics & Probability Letters, Elsevier, vol. 80(23-24), pages 1806-1813, December.
  13. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  14. Diebold, Francis X & Gunther, Todd A & Tay, Anthony S, 1998. "Evaluating Density Forecasts with Applications to Financial Risk Management," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 863-83, November.
  15. Guido Bulligan & Massimiliano Marcellino & Fabrizio Venditti, 2012. "Forecasting economic activity with higher frequency targeted predictors," Temi di discussione (Economic working papers) 847, Bank of Italy, Economic Research and International Relations Area.
  16. Bai, Jushan & Ng, Serena, 2008. "Forecasting economic time series using targeted predictors," Journal of Econometrics, Elsevier, vol. 146(2), pages 304-317, October.
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