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Making leading indicators more leading: A wavelet-based method for the construction of composite leading indexes

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  • Marco Gallegati

Abstract

This paper proposes a novel wavelet-based approach for constructing composite indicators. The wavelet-based methodology exploits the ability of wavelet analysis to analyse the relationships between variables on a scale-by-scale, rather than aggregate, basis. A wavelet-based index which combines several scale-based subindexes is constructed by using a scale-by-scale selection of the components included in the OECD composite leading indicator (CLI) for the US. The comparison with the CLI and its derived measures indicate that the wavelet-based composite index tends to provide early signals of business cycle turning points well in advance of the OECD CLI. Moreover we find that the reliability of the signals tends to increase considerably when the sub-index obtained from the time scale components corresponding to minor cycles, that is, 2-4 years, is removed from the overall wavelet-based index.Keywords: wavelets; composite leading indicators; early warning signals JEL classification: C1; C3; C5; E3

Suggested Citation

  • Marco Gallegati, 2014. "Making leading indicators more leading: A wavelet-based method for the construction of composite leading indexes," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2014(1), pages 1-21.
  • Handle: RePEc:oec:stdkab:5jxx56gqmhf1
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    File URL: http://dx.doi.org/10.1787/jbcma-2014-5jxx56gqmhf1
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    Cited by:

    1. António Rua, 2016. "A wavelet-based multivariate multiscale approach for forecasting," Working Papers w201612, Banco de Portugal, Economics and Research Department.
    2. repec:eee:intfor:v:33:y:2017:i:3:p:581-590 is not listed on IDEAS

    More about this item

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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