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Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan

  • Shintani, Mototsugu

This paper extends the diffusion index (DI) forecast approach of Stock and Watson (1998, 2002) to the case of possibly nonlinear dynamic factor models. When the number of series is large, a two-step procedure based on the method of principal components is useful since it allows wide variety of nonlinearity in the factors. The factors extracted from a large Japanese data suggest some evidence of nonlinear structure. Furthermore, both the linear and nonlinear DI forecasts in Japan outperform traditional time series forecasts, while the linear DI forecast, in most cases, performs as well as the nonlinear DI forecast.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 37 (2005)
Issue (Month): 3 (June)
Pages: 517-38

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Handle: RePEc:mcb:jmoncb:v:37:y:2005:i:3:p:517-38
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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