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Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan

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  • Mototsugu Shintani

Abstract

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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  • Mototsugu Shintani, 2010. "Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan," Levine's Working Paper Archive 506439000000000168, David K. Levine.
  • Handle: RePEc:cla:levarc:506439000000000168
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    Cited by:

    1. Hyeyoen Kim, 2011. "Large Data Sets, Nonlinearity and the Speed of Adjustment to Real Exchange Rate Shocks," Post-Print hal-00665456, HAL.
    2. Todd E. Clark & Michael W. McCracken, 2001. "Evaluating long-horizon forecasts," Research Working Paper RWP 01-14, Federal Reserve Bank of Kansas City.
    3. Boriss Siliverstovs & Kinstantin Kholodilim, 2009. "On selection of components for a diffusion index model: it's not the size, it's how you use it," Applied Economics Letters, Taylor & Francis Journals, vol. 16(12), pages 1249-1254.
    4. repec:eee:econom:v:198:y:2017:i:2:p:231-252 is not listed on IDEAS
    5. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
    6. Shintani, Mototsugu, 2008. "A dynamic factor approach to nonlinear stability analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2788-2808, September.
    7. Claudia Godbout & Marco J. Lombardi, 2012. "Short-Term Forecasting of the Japanese Economy Using Factor Models," Staff Working Papers 12-7, Bank of Canada.
    8. Todd E. Clark & Michael W. McCracken, 2009. "Combining Forecasts from Nested Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(3), pages 303-329, June.
    9. Alessandro Giovannelli, 2012. "Nonlinear Forecasting Using Large Datasets: Evidences on US and Euro Area Economies," CEIS Research Paper 255, Tor Vergata University, CEIS, revised 08 Nov 2012.
    10. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October.
    11. Bragoli, Daniela, 2017. "Now-casting the Japanese economy," International Journal of Forecasting, Elsevier, vol. 33(2), pages 390-402.
    12. Gonçalves, Sílvia & McCracken, Michael W. & Perron, Benoit, 2017. "Tests of equal accuracy for nested models with estimated factors," Journal of Econometrics, Elsevier, vol. 198(2), pages 231-252.
    13. Kholodilin Konstantin Arkadievich & Siliverstovs Boriss, 2006. "On the Forecasting Properties of the Alternative Leading Indicators for the German GDP: Recent Evidence," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 226(3), pages 234-259, June.
    14. Andrejs Bessonovs, 2015. "Suite of Latvia's GDP forecasting models," Working Papers 2015/01, Latvijas Banka.
    15. Heij, C., 2007. "Improved forecasting with leading indicators: the principal covariate index," Econometric Institute Research Papers EI 2007-23, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    16. Shibamoto, Masahiko, 2008. "The estimation of monetary policy reaction function in a data-rich environment: The case of Japan," Japan and the World Economy, Elsevier, vol. 20(4), pages 497-520, December.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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