Can we use seasonally adjusted indicators in dynamic factor models?
We examine the short-term performance of two alternative approaches of forecasting from dynamic factor models. The first approach extracts the seasonal component of the individual indicators before estimating the dynamic factor model, while the alternative uses the non seasonally adjusted data in a model that endogenously accounts for seasonal adjustment. Our Monte Carlo analysis reveals that the performance of the former is always comparable to or even better than that of the latter in all the simulated scenarios. Our results have important implications for the factor models literature because they show the that the common practice of using seasonally adjusted data in this type of models is very accurate in terms of forecasting ability. Using five coincident indicators, we illustrate this result for US data.
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- Hannan, E J & Terrell, R D & Tuckwell, N E, 1970. "The Seasonal Adjustment of Economic Time Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(1), pages 24-52, February.
- Maximo Camacho & Gabriel Perez-Quiros & Pilar Poncela, 2012.
"Markov-switching dynamic factor models in real time,"
Banco de Espa�a Working Papers
1205, Banco de Espa�a.
- Camacho, Maximo & Pérez-Quirós, Gabriel & Poncela, Pilar, 2012. "Markov-switching dynamic factor models in real time," CEPR Discussion Papers 8866, C.E.P.R. Discussion Papers.
- S. Boragan Aruoba & Francis X. Diebold, 2010.
"Real-Time Macroeconomic Monitoring: Real Activity, Inflation, and Interactions,"
PIER Working Paper Archive
10-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- S. Boragan Aruoba & Francis X. Diebold, 2010. "Real-Time Macroeconomic Monitoring: Real Activity, Inflation, and Interactions," American Economic Review, American Economic Association, vol. 100(2), pages 20-24, May.
- S. Boragan Aruoba & Francis X. Diebold, 2010. "Real-Time Macroeconomic Monitoring: Real Activity, Inflation, and Interactions," NBER Working Papers 15657, National Bureau of Economic Research, Inc.
- S. Boragan Aruoba & Francis X. Diebold, 2010. "Real-time macroeconomic monitoring: real activity, inflation, and interactions," Working Papers 10-5, Federal Reserve Bank of Philadelphia.
- Camacho, Maximo & Pérez-Quirós, Gabriel, 2009.
"Introducing the Euro-STING: Short-Term Indicator of Euro Area Growth,"
CEPR Discussion Papers
7343, C.E.P.R. Discussion Papers.
- Maximo Camacho & Gabriel Perez-Quiros, 2010. "Introducing the euro-sting: Short-term indicator of euro area growth," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 663-694.
- Maximo Camacho & Gabriel Perez-Quiros, 2008. "Introducing the EURO-STING: Short Term INdicator of Euro Area Growth," Banco de Espa�a Working Papers 0807, Banco de Espa�a.
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