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Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan

  • Mototsugu Shintani

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 principal components method is useful since it allows the wide variety of the 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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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 506439000000000168.

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Date of creation: 09 Dec 2010
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Handle: RePEc:cla:levarc:506439000000000168
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